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.
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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?
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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.
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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. …
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The Washington Post continued its practice of ignoring journalistic standards in trying to push its line on the necessity of a budget deal. An article referred to the end of the year deadline before higher tax rates and spending cuts kick in, then told readers:
“That deadline, now called the fiscal cliff, is widely believed capable of causing another recession.”
It’s actually not clear that any economists think that missing the deadline will cause the economy to fall into a recession. The Congressional Budget Office and others have projected that if higher tax rates and the legislated spending cuts stay in effect all year that the economy might fall into another recession. However, they did not project that a recession would result if we went a week or two into 2013 without a deal, especially if any tax cuts put in place were made retroactive, which would almost certainly be the case.
The Washington Post continued its practice of ignoring journalistic standards in trying to push its line on the necessity of a budget deal. An article referred to the end of the year deadline before higher tax rates and spending cuts kick in, then told readers:
“That deadline, now called the fiscal cliff, is widely believed capable of causing another recession.”
It’s actually not clear that any economists think that missing the deadline will cause the economy to fall into a recession. The Congressional Budget Office and others have projected that if higher tax rates and the legislated spending cuts stay in effect all year that the economy might fall into another recession. However, they did not project that a recession would result if we went a week or two into 2013 without a deal, especially if any tax cuts put in place were made retroactive, which would almost certainly be the case.
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One should always take second hand accounts from secret meetings with more than a grain of salt, but the Wall Street Journal’s account of President Obama’s position in his negotiations with Speaker Boehner should raise some concern. The WSJ told readers:
“The president told him [Boehner] he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.”
Huh, a spike in interest rates and a global recession? What exactly could President Obama mean if he really said this? If there is no deal over the course of 2013 [not by January 1, that is a fairy tale told for children and Washington pundits] then it is likely that we will see a recession, as the Congressional Budget Office and others have projected. But a recession is associated with lower interest rates, not higher interest rates.
If President Obama really thinks interest rates will spike because of a big tax increase coupled with the cuts in the sequester then he badly needs some new economic advisers. I’m always open to new economic theories, but it’s hard to see how you can get from standard economics to this sort of story.
If the WSJ is confident in the reliability of its sources it should be running a news piece on President Obama’s loony economics.
One should always take second hand accounts from secret meetings with more than a grain of salt, but the Wall Street Journal’s account of President Obama’s position in his negotiations with Speaker Boehner should raise some concern. The WSJ told readers:
“The president told him [Boehner] he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.”
Huh, a spike in interest rates and a global recession? What exactly could President Obama mean if he really said this? If there is no deal over the course of 2013 [not by January 1, that is a fairy tale told for children and Washington pundits] then it is likely that we will see a recession, as the Congressional Budget Office and others have projected. But a recession is associated with lower interest rates, not higher interest rates.
If President Obama really thinks interest rates will spike because of a big tax increase coupled with the cuts in the sequester then he badly needs some new economic advisers. I’m always open to new economic theories, but it’s hard to see how you can get from standard economics to this sort of story.
If the WSJ is confident in the reliability of its sources it should be running a news piece on President Obama’s loony economics.
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For those of you BTP readers playing a drinking game out there in blogland, take another swig, the Washington Post used the phrase “tame the debt” in yet another budget article. Here it is:
“If there was going to be a deal to tame the nation’s debt, it had to happen now.”
Not much to add here. I just will note for those tiring of my deficit projection chart showing the silliness of this out of control debt story, there is also the addition approach that Paul Krugman used in his Monday column. But as the deficit hawks say, “don’t bother me with your stinkin numbers!”
For those of you BTP readers playing a drinking game out there in blogland, take another swig, the Washington Post used the phrase “tame the debt” in yet another budget article. Here it is:
“If there was going to be a deal to tame the nation’s debt, it had to happen now.”
Not much to add here. I just will note for those tiring of my deficit projection chart showing the silliness of this out of control debt story, there is also the addition approach that Paul Krugman used in his Monday column. But as the deficit hawks say, “don’t bother me with your stinkin numbers!”
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Towards the end of an article that discussed efforts by Japan’s government to boost the demand for workers by generating inflation the NYT told readers:
“The country has an aging, shrinking population. It needs more workers.”
Umm, no. It does not make sense to say that Japan is suffering from inadequate demand, which means that it has more supply of workers than demand for workers, and then to say it needs more workers. Up is not down.
There is a well-funded effort in the United States to try to place demographics at the center of economic policy debates. Countries are growing older. This is not new, they have been growing older for many decades. Fans of arithmetic know that the increase in living standards that result from even modest growth in productivity swamps the impact of demographics in lowering living standards. Here’s the story for the United States over the next 23 years — the peak pressure associated with the retirement of the baby boomers.
Source: Author’s calculations.
And remember after 2035, the demographnics change little for the rest of the century, but productivity keeps growing. In short, the aging story is a joke.
Towards the end of an article that discussed efforts by Japan’s government to boost the demand for workers by generating inflation the NYT told readers:
“The country has an aging, shrinking population. It needs more workers.”
Umm, no. It does not make sense to say that Japan is suffering from inadequate demand, which means that it has more supply of workers than demand for workers, and then to say it needs more workers. Up is not down.
There is a well-funded effort in the United States to try to place demographics at the center of economic policy debates. Countries are growing older. This is not new, they have been growing older for many decades. Fans of arithmetic know that the increase in living standards that result from even modest growth in productivity swamps the impact of demographics in lowering living standards. Here’s the story for the United States over the next 23 years — the peak pressure associated with the retirement of the baby boomers.
Source: Author’s calculations.
And remember after 2035, the demographnics change little for the rest of the century, but productivity keeps growing. In short, the aging story is a joke.
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A Washington Post article on a report by the IMF’s Independent Evaluation Office criticizing political influence by the United States on the Fund’s policy may have misled readers on how countries accumulate foreign exchange reserves. The article told readers:
“A steady rise in foreign reserves — a country’s holdings of dollars, yen or other major world currencies — can be the result of large trade surpluses. But it can also stem from an undervalued exchange rate, something that the United States has long accused China of maintaining to give its products a more attractive price on world markets.”
A rise in foreign exchange reserves can only result from a decision by a central bank to buy reserves. Its access to reserves is affected by the country’s trade balance, but a central bank only ends up with reserves because it has decided to buy them. If the central bank of a country with large trade surpluses decided not to buy reserves, then its currency would rise in international markets as holders of foreign exchange (mostly dollars) dumped them on international markets to obtain more of their own country’s currency.
This would cause the price of their own country’s currency to rise and the foreign country’s currency to fall. There is no real dispute that central bank intervention keeps the dollar high against the yuan and other currencies. The only questions can be the motivation and the implications of this intervention.
A Washington Post article on a report by the IMF’s Independent Evaluation Office criticizing political influence by the United States on the Fund’s policy may have misled readers on how countries accumulate foreign exchange reserves. The article told readers:
“A steady rise in foreign reserves — a country’s holdings of dollars, yen or other major world currencies — can be the result of large trade surpluses. But it can also stem from an undervalued exchange rate, something that the United States has long accused China of maintaining to give its products a more attractive price on world markets.”
A rise in foreign exchange reserves can only result from a decision by a central bank to buy reserves. Its access to reserves is affected by the country’s trade balance, but a central bank only ends up with reserves because it has decided to buy them. If the central bank of a country with large trade surpluses decided not to buy reserves, then its currency would rise in international markets as holders of foreign exchange (mostly dollars) dumped them on international markets to obtain more of their own country’s currency.
This would cause the price of their own country’s currency to rise and the foreign country’s currency to fall. There is no real dispute that central bank intervention keeps the dollar high against the yuan and other currencies. The only questions can be the motivation and the implications of this intervention.
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Ever since the election the Wall Street gang has been trying to build up scare stories around the budget standoff between the President and the Republican House. The term “fiscal cliff” is a central part of this campaign since it implies that something ominous happens if there is no deal by the end of the year.
As every economist and budget analyst knows, it makes virtually no difference whatsoever if there is a deal 10 days before the end of the year or 10 days after. However if the Wall Street gang can build up enough fear then it will lead to more pressure to get a deal before the end of the year. Since President Obama will be on much better negotiating turf after the end of the year and the tax cuts have already expired, a deal struck this year will likely be more favorable to the Republicans.
The NYT seems to have joined in this effort, telling readers that we may “careen off the so-called fiscal cliff” if there is no deal. This sort of silly and inaccurate metaphor is best left for fiction. It has no place in a serious newspaper.
Ever since the election the Wall Street gang has been trying to build up scare stories around the budget standoff between the President and the Republican House. The term “fiscal cliff” is a central part of this campaign since it implies that something ominous happens if there is no deal by the end of the year.
As every economist and budget analyst knows, it makes virtually no difference whatsoever if there is a deal 10 days before the end of the year or 10 days after. However if the Wall Street gang can build up enough fear then it will lead to more pressure to get a deal before the end of the year. Since President Obama will be on much better negotiating turf after the end of the year and the tax cuts have already expired, a deal struck this year will likely be more favorable to the Republicans.
The NYT seems to have joined in this effort, telling readers that we may “careen off the so-called fiscal cliff” if there is no deal. This sort of silly and inaccurate metaphor is best left for fiction. It has no place in a serious newspaper.
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