Since several people in comments and e-mails raised questions on my earlier post on capital-biased technological change I will try to clarify my point. The original impetus was a Paul Krugman post in which he raised the possibility that changes in technology were causing a redistribution from labor to capital. (He has since written further on the topic.)
My point was to note that this sort of redistribution cannot just be a matter of technology, it also involves a very big role for the laws and norms that make such a redistribution possible. I referred in the earlier post to the Cambridge controversies in the theory of capital. Unfortunately, these debates were sidetracked into a narrow and largely irrelevant discussion of the possibility and likelihood of “re-switching,” a story where a production technique flips from being less capital intensive to more capital intensive as the interest rate rises or falls.
From my perspective the main takeaway from this debate is that there is no measure of capital that is independent of its price. How do we compare a steel mill, the latest supercomputer from IBM, the software produced by Google and the method for producing a lifesaving cancer drug whose patent is owned by Pfizer? Are we going to weigh each one, takes its volume? There is no measure of capital apart from its price.
This is in contrast to labor, the other part of the technology story. I would not want to minimize the problems of aggregating labor either (is an hour of a brain surgeon’s time the same thing as an hour of dishwasher’s time?), but at least there is something physically present that we can identify. What is the physical presence of a software or pharmaceutical patent? Yet, these items are hugely important in the modern return to capital story since a very large chunk of profits is earned by software companies, drug companies or other corporations that profit primarily based on their ownership of intellectual property.
Intellectual property serves a social purpose. It is a way to provide an incentive for innovation and creative work. However it is certainly not the only way. An enormous amount of research is funded publicly, as with the NIH, and also through universities and non-profits, and from private companies not seeking to profit from patent or copyright protection. It is far from clear that patents and copyrights are the most efficient mechanisms for supporting innovation and creative work. If our current intellectual property regime also has distributional consequences that we consider bad, then that would be a serious strike against it.
But the basic point is that if we are concerned that the economy is leading to a situation where an ever large share of the gains from growth are going to capital, we should not imagine that this is just the result of technological change. It was the result of conscious policy choices. As we say here at CEPR, money does not fall up.
Since several people in comments and e-mails raised questions on my earlier post on capital-biased technological change I will try to clarify my point. The original impetus was a Paul Krugman post in which he raised the possibility that changes in technology were causing a redistribution from labor to capital. (He has since written further on the topic.)
My point was to note that this sort of redistribution cannot just be a matter of technology, it also involves a very big role for the laws and norms that make such a redistribution possible. I referred in the earlier post to the Cambridge controversies in the theory of capital. Unfortunately, these debates were sidetracked into a narrow and largely irrelevant discussion of the possibility and likelihood of “re-switching,” a story where a production technique flips from being less capital intensive to more capital intensive as the interest rate rises or falls.
From my perspective the main takeaway from this debate is that there is no measure of capital that is independent of its price. How do we compare a steel mill, the latest supercomputer from IBM, the software produced by Google and the method for producing a lifesaving cancer drug whose patent is owned by Pfizer? Are we going to weigh each one, takes its volume? There is no measure of capital apart from its price.
This is in contrast to labor, the other part of the technology story. I would not want to minimize the problems of aggregating labor either (is an hour of a brain surgeon’s time the same thing as an hour of dishwasher’s time?), but at least there is something physically present that we can identify. What is the physical presence of a software or pharmaceutical patent? Yet, these items are hugely important in the modern return to capital story since a very large chunk of profits is earned by software companies, drug companies or other corporations that profit primarily based on their ownership of intellectual property.
Intellectual property serves a social purpose. It is a way to provide an incentive for innovation and creative work. However it is certainly not the only way. An enormous amount of research is funded publicly, as with the NIH, and also through universities and non-profits, and from private companies not seeking to profit from patent or copyright protection. It is far from clear that patents and copyrights are the most efficient mechanisms for supporting innovation and creative work. If our current intellectual property regime also has distributional consequences that we consider bad, then that would be a serious strike against it.
But the basic point is that if we are concerned that the economy is leading to a situation where an ever large share of the gains from growth are going to capital, we should not imagine that this is just the result of technological change. It was the result of conscious policy choices. As we say here at CEPR, money does not fall up.
Read More Leer más Join the discussion Participa en la discusión
Perhaps we should be glad that the NYT gives their regular editors vacations over the holidays, but there still should have been someone to stop or qualify these lines:
“For months, President Obama, members of Congress of both parties and top economists have warned that the nation’s fragile economy could be swept back into recession if the two parties did not come to a post-election compromise on January’s combination of tax increases and across-the-board spending cuts.
“Yet with days left before the fiscal punch lands, both sides are exhibiting little sense of urgency, and new public statements Wednesday appeared to be designed more to ensure the other side is blamed rather than to foster progress toward a deal.”
Nope, there are no economists who have warned that we have a serious risk of recession if there is no deal by January 1, 2013. The risk of recession comes if we go several months into 2013 without a deal. Those are very different scenarios, someone at the NYT must be able to understand this fact.
Perhaps we should be glad that the NYT gives their regular editors vacations over the holidays, but there still should have been someone to stop or qualify these lines:
“For months, President Obama, members of Congress of both parties and top economists have warned that the nation’s fragile economy could be swept back into recession if the two parties did not come to a post-election compromise on January’s combination of tax increases and across-the-board spending cuts.
“Yet with days left before the fiscal punch lands, both sides are exhibiting little sense of urgency, and new public statements Wednesday appeared to be designed more to ensure the other side is blamed rather than to foster progress toward a deal.”
Nope, there are no economists who have warned that we have a serious risk of recession if there is no deal by January 1, 2013. The risk of recession comes if we go several months into 2013 without a deal. Those are very different scenarios, someone at the NYT must be able to understand this fact.
Read More Leer más Join the discussion Participa en la discusión
Yes, the Washington Post is getting very worried that it will have egg all over its face if January 1 comes with no budget deal and we don’t get its promised recession. The paper pushed this line yet again, telling readers:
“Unless the House and the Senate can agree on a way to avoid the “fiscal cliff,” more than $500 billion in tax increases and spending cuts will take effect next year, potentially sparking a new recession.”
Of course the potential for a new recession does not refer to missing the January 1 deadline. It is the risk the country faces if we continue well into 2013 paying higher tax rates and with large cuts in spending. This is an enormously important distinction.
This is not the only important distinction missed in this piece. It told readers that President Obama and Speaker Boehner were very close to a deal:
“Boehner offered to raise $1 trillion in fresh revenue, and he wanted spending cuts of equal size. By that measure, Obama’s tax offer was $300 billion too high and his cuts $150 billion too low, for a net difference between the two men of about $450 billion — less than 1 percent of projected federal spending over the next decade.
In the end, however, the gap proved to be much wider politically than it was numerically.”
Actually, Boehner never specified the tax increases that raised $1 trillion in fresh revenue. ( If he did, the Post did not bother to report them.) So it is not clear how far apart they were. It is also likely that one of Boehner’s big revenue raisers would have been a cap on deductions, including the deduction for state and local taxes. This would make it far more difficult for states like New York and California to maintain their current level of taxation. President Obama would find considerable resistance among Democrats to this sort of deal.
The piece also refered to Senator Lindsey Graham’s warnings that the country could end up like Greece. It should have pointed out that Graham is either ignorant of economics or was trying to needlessly scare his audience since there is no way the United States can end up like Greece.
The United States borrows in its own currency, which means that it will always be able to pay its debt. Its worst risk would be inflation, which is a very remote risk at the moment. Greece, on the other hand is like Ohio. It cannot borrow in its own currency. The Post should have pointed out this distinction to its readers since some might have taken Lindsey’s scare story seriously.
The piece also tells readers that Starbucks decision to make employees write “come together” on cups is a “‘sign of mounting anxiety over Washington gridlock.” While anxiety may explain the motivation of Starbucks CEO Howard Schultz, he may also just want to curry favor of the powerful executives in the Campaign to Fix the Debt and win praise from their allies in elite media outlets like the Washington Post. Since Schultz’s motives are not known, a serious newspaper would just report his actions without implying that it knew his motives.
Yes, the Washington Post is getting very worried that it will have egg all over its face if January 1 comes with no budget deal and we don’t get its promised recession. The paper pushed this line yet again, telling readers:
“Unless the House and the Senate can agree on a way to avoid the “fiscal cliff,” more than $500 billion in tax increases and spending cuts will take effect next year, potentially sparking a new recession.”
Of course the potential for a new recession does not refer to missing the January 1 deadline. It is the risk the country faces if we continue well into 2013 paying higher tax rates and with large cuts in spending. This is an enormously important distinction.
This is not the only important distinction missed in this piece. It told readers that President Obama and Speaker Boehner were very close to a deal:
“Boehner offered to raise $1 trillion in fresh revenue, and he wanted spending cuts of equal size. By that measure, Obama’s tax offer was $300 billion too high and his cuts $150 billion too low, for a net difference between the two men of about $450 billion — less than 1 percent of projected federal spending over the next decade.
In the end, however, the gap proved to be much wider politically than it was numerically.”
Actually, Boehner never specified the tax increases that raised $1 trillion in fresh revenue. ( If he did, the Post did not bother to report them.) So it is not clear how far apart they were. It is also likely that one of Boehner’s big revenue raisers would have been a cap on deductions, including the deduction for state and local taxes. This would make it far more difficult for states like New York and California to maintain their current level of taxation. President Obama would find considerable resistance among Democrats to this sort of deal.
The piece also refered to Senator Lindsey Graham’s warnings that the country could end up like Greece. It should have pointed out that Graham is either ignorant of economics or was trying to needlessly scare his audience since there is no way the United States can end up like Greece.
The United States borrows in its own currency, which means that it will always be able to pay its debt. Its worst risk would be inflation, which is a very remote risk at the moment. Greece, on the other hand is like Ohio. It cannot borrow in its own currency. The Post should have pointed out this distinction to its readers since some might have taken Lindsey’s scare story seriously.
The piece also tells readers that Starbucks decision to make employees write “come together” on cups is a “‘sign of mounting anxiety over Washington gridlock.” While anxiety may explain the motivation of Starbucks CEO Howard Schultz, he may also just want to curry favor of the powerful executives in the Campaign to Fix the Debt and win praise from their allies in elite media outlets like the Washington Post. Since Schultz’s motives are not known, a serious newspaper would just report his actions without implying that it knew his motives.
Read More Leer más Join the discussion Participa en la discusión
The Serious People who are hyping the importance of a deal on the budget standoff before January 1 have various scare stories that are supposed to make us believe that missing the deadline will lead to an economic catastrophe. Part of the story is that consumers will freak out and stop buying things.
This part does not appear to be supported by the data, as the Conference Board Index of consumer confidence showed a sharp increase in December. Actually, that’s not entirely right. The index fell sharply in December, from 71.5 in November to 65. However, this drop was entirely due to a drop in the future expectations index. This index has almost no relationship to current consumption.
On the other hand, the current conditions index, which tracks consumption reasonably well, rose to 62.8 in December from 57.4 in November. This is the index that tells us what people are actually doing.
The future expectations index reflects the nonsense reported in the media, which these days means lots of end of the world prophecies over missing the December 31st deadline.
Addendum: The NYT committed the same sin.
The Serious People who are hyping the importance of a deal on the budget standoff before January 1 have various scare stories that are supposed to make us believe that missing the deadline will lead to an economic catastrophe. Part of the story is that consumers will freak out and stop buying things.
This part does not appear to be supported by the data, as the Conference Board Index of consumer confidence showed a sharp increase in December. Actually, that’s not entirely right. The index fell sharply in December, from 71.5 in November to 65. However, this drop was entirely due to a drop in the future expectations index. This index has almost no relationship to current consumption.
On the other hand, the current conditions index, which tracks consumption reasonably well, rose to 62.8 in December from 57.4 in November. This is the index that tells us what people are actually doing.
The future expectations index reflects the nonsense reported in the media, which these days means lots of end of the world prophecies over missing the December 31st deadline.
Addendum: The NYT committed the same sin.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
A Washington Post article on how most Democrats have come to support the Bush tax cuts for the bottom 98 percent of the population, after originally opposing them, told readers:
“The Democrats were also correct in warning about the effect on the government’s debt. The tax cuts did more to fuel ballooning federal deficits over the past decade than any other Bush administration action — including the wars in Afghanistan and Iraq and the creation of a prescription drug benefit for seniors, according to the Pew Fiscal Analysis Initiative. And in coming years, the Bush-era tax cuts are projected to expand the deficit by trillions more.”
Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billions in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.
While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.
A Washington Post article on how most Democrats have come to support the Bush tax cuts for the bottom 98 percent of the population, after originally opposing them, told readers:
“The Democrats were also correct in warning about the effect on the government’s debt. The tax cuts did more to fuel ballooning federal deficits over the past decade than any other Bush administration action — including the wars in Afghanistan and Iraq and the creation of a prescription drug benefit for seniors, according to the Pew Fiscal Analysis Initiative. And in coming years, the Bush-era tax cuts are projected to expand the deficit by trillions more.”
Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billions in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.
While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.
Read More Leer más Join the discussion Participa en la discusión
Paul Krugman has been rightly troubled by the continuing shift of income shares from labor to capital. However the explanation he considers in the form of capital-biased technological progress requires a little more careful examination.
Krugman discusses the case where there is an exogenous change in the nature of technology that makes capital relatively more productive than labor. This leads to more capital being used, driving up its price, and less labor being used, driving down its price (i.e. wages).
This is a relatively straightforward story, but there is a serious problem. Capital is not a well-defined item. Back in the good old days we could have one good models where capital was corn that we had chosen to use as seed rather than eat. However, once we move into the real world, we have to recognize that what counts as a “capital” is a diverse array of items that includes not only physical goods, but also things likes patents.
There is a long literature on the problem of measuring capital. (The Cambridge capital controversy gives some of the flavor.) But, just to make a simple point, we might end up with considerably less “capital” if we shortened, weakened, or eliminated patent protection, especially in areas where it arguably is impeding technological progress (e.g. software and prescription drugs).
For this reason, the fact that we may appear to be seeing capital-biased technological progress should not be viewed as just some unfortunate event in the world that we have to learn to cope with. If we are in fact seeing capital-biased technological progress it is almost certainly the case that it is at least in part the result of policy decisions that could be handled differently.
Paul Krugman has been rightly troubled by the continuing shift of income shares from labor to capital. However the explanation he considers in the form of capital-biased technological progress requires a little more careful examination.
Krugman discusses the case where there is an exogenous change in the nature of technology that makes capital relatively more productive than labor. This leads to more capital being used, driving up its price, and less labor being used, driving down its price (i.e. wages).
This is a relatively straightforward story, but there is a serious problem. Capital is not a well-defined item. Back in the good old days we could have one good models where capital was corn that we had chosen to use as seed rather than eat. However, once we move into the real world, we have to recognize that what counts as a “capital” is a diverse array of items that includes not only physical goods, but also things likes patents.
There is a long literature on the problem of measuring capital. (The Cambridge capital controversy gives some of the flavor.) But, just to make a simple point, we might end up with considerably less “capital” if we shortened, weakened, or eliminated patent protection, especially in areas where it arguably is impeding technological progress (e.g. software and prescription drugs).
For this reason, the fact that we may appear to be seeing capital-biased technological progress should not be viewed as just some unfortunate event in the world that we have to learn to cope with. If we are in fact seeing capital-biased technological progress it is almost certainly the case that it is at least in part the result of policy decisions that could be handled differently.
Read More Leer más Join the discussion Participa en la discusión
Alan Greenspan will go down in history as the person who has done more damage to the U.S. economy and society that anyone who was not a foreign enemy. In fact the destruction he wreaked through his incompetence would also exceed the damage caused by almost all would-be enemies as well.
Greenspan accomplished the remarkable feat as Fed chair of ignoring the growth of the $8 trillion housing bubble. This bubble could not have been easier to see if it had been 500 feet high and lit up with huge neon signs saying “Huge Housing Bubble.” But Greenspan insisted the bubble was not there.
And Greenspan somehow didn’t recognize that the collapse of this massive bubble would devastate the economy. The bubble was generating over $1 trillion in annual demand through its direct impact on housing construction and its indirect impact on consumption through the housing wealth effect. This demand would inevitably disappear when the bubble burst, leaving a huge hole in demand.
Did Greenspan think that the private sector had some magic formula to replace this demand? What could he have been thinking or smoking?
If we had a political debate that was driven by evidence, where the accuracy of one’s past judgements played any role in the credibility granted their current opinion, then Greenspan would be relegated to the role of ranting fool. His opinions on the economy would be given slightly less credibility than the mumblings of a street drunk.
This is why it would have been worth highlighting the news contained in a NYT article on the origins of the “Campaign to Fix the Debt,” the corporate financed effort to reduce the deficit. The article tells readers in passing:
“The Campaign to Fix the Debt started to come together at a salon dinner held in the backyard of Senator Mark Warner, Democrat of Virginia, in the fall of 2011. An influential group of economic, political and business leaders — including the former Federal Reserve chairman Alan Greenspan and Mark Bertolini, the chief executive of the Aetna insurance company — huddled in a too-small tent in the pouring rain.”
This is such an amazing tidbit that it really should have been the lead of the article. The person most responsible for wrecking the economy — and incidentially adding trillions of dollars to the debt — was there at the founding of the Campaign to Fix the Debt.
Wow, what did Santa get you for Christmas?
Alan Greenspan will go down in history as the person who has done more damage to the U.S. economy and society that anyone who was not a foreign enemy. In fact the destruction he wreaked through his incompetence would also exceed the damage caused by almost all would-be enemies as well.
Greenspan accomplished the remarkable feat as Fed chair of ignoring the growth of the $8 trillion housing bubble. This bubble could not have been easier to see if it had been 500 feet high and lit up with huge neon signs saying “Huge Housing Bubble.” But Greenspan insisted the bubble was not there.
And Greenspan somehow didn’t recognize that the collapse of this massive bubble would devastate the economy. The bubble was generating over $1 trillion in annual demand through its direct impact on housing construction and its indirect impact on consumption through the housing wealth effect. This demand would inevitably disappear when the bubble burst, leaving a huge hole in demand.
Did Greenspan think that the private sector had some magic formula to replace this demand? What could he have been thinking or smoking?
If we had a political debate that was driven by evidence, where the accuracy of one’s past judgements played any role in the credibility granted their current opinion, then Greenspan would be relegated to the role of ranting fool. His opinions on the economy would be given slightly less credibility than the mumblings of a street drunk.
This is why it would have been worth highlighting the news contained in a NYT article on the origins of the “Campaign to Fix the Debt,” the corporate financed effort to reduce the deficit. The article tells readers in passing:
“The Campaign to Fix the Debt started to come together at a salon dinner held in the backyard of Senator Mark Warner, Democrat of Virginia, in the fall of 2011. An influential group of economic, political and business leaders — including the former Federal Reserve chairman Alan Greenspan and Mark Bertolini, the chief executive of the Aetna insurance company — huddled in a too-small tent in the pouring rain.”
This is such an amazing tidbit that it really should have been the lead of the article. The person most responsible for wrecking the economy — and incidentially adding trillions of dollars to the debt — was there at the founding of the Campaign to Fix the Debt.
Wow, what did Santa get you for Christmas?
Read More Leer más Join the discussion Participa en la discusión
Many news outlets, most notably the Washington Post, have been busy creating disaster stories associated with the failure to reach an agreement on the budget by January 1, 2013. Ryan Grim at the Huffington Post approached the issue as a news reporter would, by asking what is likely to happen if there is no deal by that date.
The answer is essentially nothing. No one disputes that if we drag on several months into 2013 without a deal that higher taxes and lower government spending will be a serious hit to the economy. But the consequences to the economy of not reaching a deal by New Year’s itself is pretty much zero. (It will mean unnecessary stress for people facing the cutoff of unemployment insurance and other benefits, but the impact of this on the economy will be pretty much undetectable.)
Anyhow while most of the media have horribly failed the country in their reporting on this issue, Ryan Grim and the Huffington Post came through.
Many news outlets, most notably the Washington Post, have been busy creating disaster stories associated with the failure to reach an agreement on the budget by January 1, 2013. Ryan Grim at the Huffington Post approached the issue as a news reporter would, by asking what is likely to happen if there is no deal by that date.
The answer is essentially nothing. No one disputes that if we drag on several months into 2013 without a deal that higher taxes and lower government spending will be a serious hit to the economy. But the consequences to the economy of not reaching a deal by New Year’s itself is pretty much zero. (It will mean unnecessary stress for people facing the cutoff of unemployment insurance and other benefits, but the impact of this on the economy will be pretty much undetectable.)
Anyhow while most of the media have horribly failed the country in their reporting on this issue, Ryan Grim and the Huffington Post came through.
Read More Leer más Join the discussion Participa en la discusión
Fareed Zakaria is very unhappy that “The American Left,” by whom he means the vast majority of people across the political spectrum who oppose cuts to Social Security and Medicare, insist on taking arithmetic seriously. They are refusing to join Peter Peterson and his wealthy friends in the Campaign to Fix the Debt in their crusade to cut these key social insurance programs.
Zakaria tells readers:
“The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. …
Fareed Zakaria is very unhappy that “The American Left,” by whom he means the vast majority of people across the political spectrum who oppose cuts to Social Security and Medicare, insist on taking arithmetic seriously. They are refusing to join Peter Peterson and his wealthy friends in the Campaign to Fix the Debt in their crusade to cut these key social insurance programs.
Zakaria tells readers:
“The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. …
Read More Leer más Join the discussion Participa en la discusión
