The NYT notes that the new jobs being created in the upturn tend to be low-paying jobs. This is not surprising. The jobs that are created in large part reflect the state of the labor market. No one will work the midnight shift at the local 7-11 for the minimum wage if they have the opportunity to get relatively good paying jobs in manufacturing, construction, or health care.
High unemployment leads to lower wages for most workers both by lowering the wages in their jobs and leading to a mix that has more lower paying jobs than would be the case if the economy was near full employment. (This was the point of my book with Jared Bernstein, The Benefits of Full Employment.)
High unemployment tends to have less effect on the most highly educated workers since few doctors and lawyers are laid off when the economy goes into recession. (Although this downturn may have had some downward effect even on the wages of lawyers.) This is why macroeconomic policy has to be very much understood as a class biased policy. When the ineptitude of the Fed allowed the housing bubble to grow to incredibly dangerous proportions, it was the livelihoods of tens of millions low and middle-income workers that were being put at risk, along with their savings, which were overwhelmingly in their homes.
In the same vein, the Fed’s new commitment to target 2.0 percent inflation, implicitly at the cost of higher unemployment, is a promise to throw low and middle class people out of work in order to put downward pressure on their wages to keep inflation from rising above its target level. The impact of this policy is likely to dwarf the impact of federal tax policy in its impact on most non-rich Americans.
The NYT notes that the new jobs being created in the upturn tend to be low-paying jobs. This is not surprising. The jobs that are created in large part reflect the state of the labor market. No one will work the midnight shift at the local 7-11 for the minimum wage if they have the opportunity to get relatively good paying jobs in manufacturing, construction, or health care.
High unemployment leads to lower wages for most workers both by lowering the wages in their jobs and leading to a mix that has more lower paying jobs than would be the case if the economy was near full employment. (This was the point of my book with Jared Bernstein, The Benefits of Full Employment.)
High unemployment tends to have less effect on the most highly educated workers since few doctors and lawyers are laid off when the economy goes into recession. (Although this downturn may have had some downward effect even on the wages of lawyers.) This is why macroeconomic policy has to be very much understood as a class biased policy. When the ineptitude of the Fed allowed the housing bubble to grow to incredibly dangerous proportions, it was the livelihoods of tens of millions low and middle-income workers that were being put at risk, along with their savings, which were overwhelmingly in their homes.
In the same vein, the Fed’s new commitment to target 2.0 percent inflation, implicitly at the cost of higher unemployment, is a promise to throw low and middle class people out of work in order to put downward pressure on their wages to keep inflation from rising above its target level. The impact of this policy is likely to dwarf the impact of federal tax policy in its impact on most non-rich Americans.
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The United States doesn’t understand much about free markets. If it did, people here would realize that patents and copyrights are big government, not the free market. China is trying to teach this lesson to Apple. As the Post reports, a Chinese firm is filing a patent infringement lawsuit against Apple.
This is undoubtedly the first of many such suits. Strong patent laws are likely to create many high-paying jobs for lawyers, however they are almost certainly an impediment to innovation in the 21st century. Unfortunately, because protectionists so completely dominate public debate, fundamental reform of patent policy is not even being considered by leading political figures in either political party.
The United States doesn’t understand much about free markets. If it did, people here would realize that patents and copyrights are big government, not the free market. China is trying to teach this lesson to Apple. As the Post reports, a Chinese firm is filing a patent infringement lawsuit against Apple.
This is undoubtedly the first of many such suits. Strong patent laws are likely to create many high-paying jobs for lawyers, however they are almost certainly an impediment to innovation in the 21st century. Unfortunately, because protectionists so completely dominate public debate, fundamental reform of patent policy is not even being considered by leading political figures in either political party.
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A lengthy NYT Magazine piece reports on the increasing number of couples where the women earns more than the man. It notes that one reason is that women are graduating college in higher numbers. At one point it presents the views of Michael Greenstone, an economist at M.I.T. and director of the Hamilton Project:
“An important long-term issue is that men are not doing as well as women in keeping up with the demands of the global economy. … It’s a first-order mystery for social scientists, why women have more clearly heard the message that the economy has changed and men have such a hard time hearing it or responding.”
Actually it is not as much of a mystery to people who know the data. There is considerable wage dispersion for both men with college degrees and men with just high school degrees. As a result, even though on average college grads earn much more than men with just a high school degree, there are many men with college degrees who earn less than people with just high school degrees. My colleague John Schmitt and Heather Boushey found that in 2009, 20 percent of recent college grads earned less than the average high school graduate.
Stepping back a bit, it is likely that the marginal high school grad, who is debating going to college, would be near the top of the wage distribution for people with just high school degrees. On the other hand, if they were to go to college, they would likely be towards the bottom of the distribution of people with college degrees. Given the expense and opportunity cost of going to college, it might be a very reasonable decision for this person not to opt to go to college.
If the NYT had found someone more familiar with the data, they could have explained this point to readers.
A lengthy NYT Magazine piece reports on the increasing number of couples where the women earns more than the man. It notes that one reason is that women are graduating college in higher numbers. At one point it presents the views of Michael Greenstone, an economist at M.I.T. and director of the Hamilton Project:
“An important long-term issue is that men are not doing as well as women in keeping up with the demands of the global economy. … It’s a first-order mystery for social scientists, why women have more clearly heard the message that the economy has changed and men have such a hard time hearing it or responding.”
Actually it is not as much of a mystery to people who know the data. There is considerable wage dispersion for both men with college degrees and men with just high school degrees. As a result, even though on average college grads earn much more than men with just a high school degree, there are many men with college degrees who earn less than people with just high school degrees. My colleague John Schmitt and Heather Boushey found that in 2009, 20 percent of recent college grads earned less than the average high school graduate.
Stepping back a bit, it is likely that the marginal high school grad, who is debating going to college, would be near the top of the wage distribution for people with just high school degrees. On the other hand, if they were to go to college, they would likely be towards the bottom of the distribution of people with college degrees. Given the expense and opportunity cost of going to college, it might be a very reasonable decision for this person not to opt to go to college.
If the NYT had found someone more familiar with the data, they could have explained this point to readers.
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Most of the media have been doing fluff pieces on Representative Ryan ever since he was announced as Governor Romney’s pick for his VP candidate. (My favorite is this Post piece which waxes eloquently on his use of the word “baseline.”) Just in case any reporters decide to do any real reporting, I’d suggest they try taking issue with his account of the crushing debt burden that we are passing on to our children.
Representative Ryan seems impressed by big numbers (i.e. trillions), but seems to have difficulty with simple concepts. If we look at the ratio of our interest burden as share of GDP, it is close to 1.5 percent. This is near its low point for the post-war era.
Source: Congressional Budget Office.
In other words, instead of having a burden that is at a record high, the interest burden that we are now facing is near a post-war low. How can a budget wonk be so far from reality?
In fact, if we factor in the $80 billion in interest earnings that the Fed is refunding to the Treasury each year, the net interest burden is only about 1.0 percent of GDP, its lowest level since World War II.
There is one other item that should have caught the attention of reporters. Ryan hyped the fact that one of the major rating agencies downgraded the debt of the U.S. government. (The other two did not.) However the financial markets have been willing to lend the United States trillions of dollars at the lowest interest rate since World War II.
What sort of Ayn Rand follower takes the judgement of the bureaucrats and accountants in a credit-rating agency over the views of millions of investors putting trillions of dollars of their own money on the line? Let’s face it, Ryan is a wuss.
Most of the media have been doing fluff pieces on Representative Ryan ever since he was announced as Governor Romney’s pick for his VP candidate. (My favorite is this Post piece which waxes eloquently on his use of the word “baseline.”) Just in case any reporters decide to do any real reporting, I’d suggest they try taking issue with his account of the crushing debt burden that we are passing on to our children.
Representative Ryan seems impressed by big numbers (i.e. trillions), but seems to have difficulty with simple concepts. If we look at the ratio of our interest burden as share of GDP, it is close to 1.5 percent. This is near its low point for the post-war era.
Source: Congressional Budget Office.
In other words, instead of having a burden that is at a record high, the interest burden that we are now facing is near a post-war low. How can a budget wonk be so far from reality?
In fact, if we factor in the $80 billion in interest earnings that the Fed is refunding to the Treasury each year, the net interest burden is only about 1.0 percent of GDP, its lowest level since World War II.
There is one other item that should have caught the attention of reporters. Ryan hyped the fact that one of the major rating agencies downgraded the debt of the U.S. government. (The other two did not.) However the financial markets have been willing to lend the United States trillions of dollars at the lowest interest rate since World War II.
What sort of Ayn Rand follower takes the judgement of the bureaucrats and accountants in a credit-rating agency over the views of millions of investors putting trillions of dollars of their own money on the line? Let’s face it, Ryan is a wuss.
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Morgan Stanley director Erskine Bowles got a couple of big things wrong in a “Room for Debate” comment in the NYT. First he refers to “our commission’s plan.” His commission did not produce a plan. To produce a plan it would have needed 14 votes. The plan that he and his co-chair, Alan Simpson, developed only got the support of 11 members of the commission.
He also refers to the crisis that will result from not taking steps to reduce the deficit as “the most predictable economic crisis in history.” Actually, the most predictable crisis in economic history was the downturn that we are now suffering from due to the collapse of the housing bubble. It was easy to see that the bubble would burst and lead to a large downturn, since there was no easy way to replace the $1.4 trillion in annual demand generated by the bubble.
There is no obvious crisis associated with the current budget path. It would be helpful if Bowles could spell out what he envisions, since a country that has its own currency faces no prospect of ever seeing a crisis like that facing Greece or Ireland, which don’t have their own currency. It is also worth noting that the interest burden on the debt, net of payments from the Fed to the Treasury, is only around 1.0 percent. This is the lowest that it has been in the post-war era.
Morgan Stanley director Erskine Bowles got a couple of big things wrong in a “Room for Debate” comment in the NYT. First he refers to “our commission’s plan.” His commission did not produce a plan. To produce a plan it would have needed 14 votes. The plan that he and his co-chair, Alan Simpson, developed only got the support of 11 members of the commission.
He also refers to the crisis that will result from not taking steps to reduce the deficit as “the most predictable economic crisis in history.” Actually, the most predictable crisis in economic history was the downturn that we are now suffering from due to the collapse of the housing bubble. It was easy to see that the bubble would burst and lead to a large downturn, since there was no easy way to replace the $1.4 trillion in annual demand generated by the bubble.
There is no obvious crisis associated with the current budget path. It would be helpful if Bowles could spell out what he envisions, since a country that has its own currency faces no prospect of ever seeing a crisis like that facing Greece or Ireland, which don’t have their own currency. It is also worth noting that the interest burden on the debt, net of payments from the Fed to the Treasury, is only around 1.0 percent. This is the lowest that it has been in the post-war era.
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It really is bizarre, but apparently the NYT doesn’t know what line of work President Obama is in. Perhaps they think he is a jazz singer, a mystery writer, who knows? While the rest of us know that President Obama is a politician, the NYT somehow thinks he is a philosopher. It told readers this in the very first sentence of a front page article on Representative Ryan’s acceptance speech at the Republican convention referring to “President Obama’s governing philosophy.”
The article never explains how it came to the conclusion that President Obama has a governing philosophy. While a philosopher might have a governing philosophy, a politician responds to political pressures from powerful interest group. President Obama very obviously does the latter, the NYT gives us no information as to why it thinks that President Obama is a philosopher.
This piece also erred by following Representative Ryan in referring to his accusation about President Obama’s failure, “to act on the recommendations of his own bipartisan debt commission.” While the article did point out that as a member of the commission, Representative Ryan had voted against the plan put forward by the commission co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson, it did not point out that the plan actually was not adopted by the commission. To have been approved, the report would have needed the support of 14 members of the commission. It only had the support of 11 members. It is therefore inaccurate to refer to the report as coming from the commission.
The piece also does a he said/she said segment on Medicare, telling readers:
“Mr. Ryan made it clear that he would portray the Romney-Ryan ticket as protecting Medicare, not ‘raiding it,’ as he said Democrats would, saying his own mother’s reliance on the program should be proof of his commitment to it.”
Many readers may not realize that both Governor Romney and Representative Ryan have proposed replacing Medicare with a voucher program. This voucher system would not assure beneficiaries that they would have the money to afford a policy equivalent to the current Medicare program.
It really is bizarre, but apparently the NYT doesn’t know what line of work President Obama is in. Perhaps they think he is a jazz singer, a mystery writer, who knows? While the rest of us know that President Obama is a politician, the NYT somehow thinks he is a philosopher. It told readers this in the very first sentence of a front page article on Representative Ryan’s acceptance speech at the Republican convention referring to “President Obama’s governing philosophy.”
The article never explains how it came to the conclusion that President Obama has a governing philosophy. While a philosopher might have a governing philosophy, a politician responds to political pressures from powerful interest group. President Obama very obviously does the latter, the NYT gives us no information as to why it thinks that President Obama is a philosopher.
This piece also erred by following Representative Ryan in referring to his accusation about President Obama’s failure, “to act on the recommendations of his own bipartisan debt commission.” While the article did point out that as a member of the commission, Representative Ryan had voted against the plan put forward by the commission co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson, it did not point out that the plan actually was not adopted by the commission. To have been approved, the report would have needed the support of 14 members of the commission. It only had the support of 11 members. It is therefore inaccurate to refer to the report as coming from the commission.
The piece also does a he said/she said segment on Medicare, telling readers:
“Mr. Ryan made it clear that he would portray the Romney-Ryan ticket as protecting Medicare, not ‘raiding it,’ as he said Democrats would, saying his own mother’s reliance on the program should be proof of his commitment to it.”
Many readers may not realize that both Governor Romney and Representative Ryan have proposed replacing Medicare with a voucher program. This voucher system would not assure beneficiaries that they would have the money to afford a policy equivalent to the current Medicare program.
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An article reporting on the Commerce Department’s release of data showing a small upward revision in second quarter GDP told readers that Federal Reserve Board Chairman Ben Bernanke faces a “delicate decision” in deciding whether to take further steps to boost the economy. While the piece notes the economy’s continuing weakness, it tells readers:
“More aggressive steps to stimulate the economy will also draw criticism from Republicans, who have demanded that Mr. Bernanke forswear additional monetary moves for now.”
While it might be beneficial to the Republicans to have a weak economy over the next two months, it is not Bernanke’s job to help them win the election. The Federal Reserve Board is supposed to target full employment and price stability. Since there is no evidence whatsoever of significant inflationary pressures in the economy, the Fed should be focused on the full employment part of the mandate.
The Fed’s charter does not say anything about not boosting the economy in a context where its actions could have an impact on the election. There can be little dispute that the economy is operating well below full employment which means that the Fed should be focused on increasing employment, even if the Republicans don’t want to see more job growth before the election. (As a practical matter, the Fed’s actions at its next meeting in mid-September are unlikely to have a noticeable impact on the economy by the election.)
An article reporting on the Commerce Department’s release of data showing a small upward revision in second quarter GDP told readers that Federal Reserve Board Chairman Ben Bernanke faces a “delicate decision” in deciding whether to take further steps to boost the economy. While the piece notes the economy’s continuing weakness, it tells readers:
“More aggressive steps to stimulate the economy will also draw criticism from Republicans, who have demanded that Mr. Bernanke forswear additional monetary moves for now.”
While it might be beneficial to the Republicans to have a weak economy over the next two months, it is not Bernanke’s job to help them win the election. The Federal Reserve Board is supposed to target full employment and price stability. Since there is no evidence whatsoever of significant inflationary pressures in the economy, the Fed should be focused on the full employment part of the mandate.
The Fed’s charter does not say anything about not boosting the economy in a context where its actions could have an impact on the election. There can be little dispute that the economy is operating well below full employment which means that the Fed should be focused on increasing employment, even if the Republicans don’t want to see more job growth before the election. (As a practical matter, the Fed’s actions at its next meeting in mid-September are unlikely to have a noticeable impact on the economy by the election.)
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In a blog post yesterday Case Mulligan told readers:
“In reality, cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs.”
Unfortunately Mulligan provides no evidence to back up his version of reality. By contrast, Jesse Rothstein, an economist at Berkeley, looked at the behavior of unemployed workers. He found that at most, the supply-side effect from the extended duration of unemployment benefits in this downturn increased measured unemployment by 0.1-0.5 percentage points. Furthermore, most of this increase was due to keeping workers looking for work and therefore being counted as unemployed. (When a worker stops looking for work, they are no longer counted as being unemployed.)
Rothstein’s calculations are only designed to pick up the incentive effect that Mulligan focuses on in his blog post. Since the benefits gave workers tens of billions of dollars that they would not have otherwise, they undoubtedly had a large demand side effect. The Congressional Budget Office estimates the multiplier for unemployment benefits as being 1.6, meaning that the $40 billion a year in extended benefits (roughly the amount at stake) would lead to an increase in GDP of $64 billion or more than 0.4 percent of GDP. If the increase in employment is proportionate, it would imply 560,000 additional jobs. This would swamp the negative supply side effect that Rothstein found in his research.
In a blog post yesterday Case Mulligan told readers:
“In reality, cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs.”
Unfortunately Mulligan provides no evidence to back up his version of reality. By contrast, Jesse Rothstein, an economist at Berkeley, looked at the behavior of unemployed workers. He found that at most, the supply-side effect from the extended duration of unemployment benefits in this downturn increased measured unemployment by 0.1-0.5 percentage points. Furthermore, most of this increase was due to keeping workers looking for work and therefore being counted as unemployed. (When a worker stops looking for work, they are no longer counted as being unemployed.)
Rothstein’s calculations are only designed to pick up the incentive effect that Mulligan focuses on in his blog post. Since the benefits gave workers tens of billions of dollars that they would not have otherwise, they undoubtedly had a large demand side effect. The Congressional Budget Office estimates the multiplier for unemployment benefits as being 1.6, meaning that the $40 billion a year in extended benefits (roughly the amount at stake) would lead to an increase in GDP of $64 billion or more than 0.4 percent of GDP. If the increase in employment is proportionate, it would imply 560,000 additional jobs. This would swamp the negative supply side effect that Rothstein found in his research.
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Ezra Klein gives us a graph from the Center on Budget and Policy Priorities that shows the ratio of debt to GDP from 2001 to 2019. The graph attributes the rise in the debt to various causes. The Bush tax cuts and the wars in Iraq and Afghanistan are shown to be major culprits.
There actually is a much better graph that people can use. This is the graph showing interest on the debt as a share of GDP.
Source: Congressional Budget Office.
Note that this one looks considerably less scary. We don’t get back to the same devastating interest burdens we faced in the early 90s until 2019. Yes folks, that was snark. Unless I’ve gone senile the interest burden we faced in the early 90s did not prevent us from having a decade of solid growth and low unemployment at the end of the period.
Am I pulling a fast one here by switching from debt to interest payments? Not at all. Suppose we issue $4 trillion in 30-year bonds in 2012 at 2.75 percent interest (roughly the going yield). Suppose the economy recovers, as CBO predicts, and the interest rate is up around 6.0 percent in 4-5 years. The federal government would be able to buy back the $4 trillion in bonds it had issued for roughly $2 trillion, immediately eliminating $2 trillion of its debt. This will make those who fixate on the debt hysterically happy, but will not affect the government’s finances in the least. It will still face the same interest obligation.
The point here is that the fixation on the debt by both parties has paralyzed economic policy so that tens of millions of people are now being needlessly forced to suffer the effects of unemployment. We need graphs that focus on the economy, not silliness that distracts from real issues in order to assign partisan blame. (Yes, the Bush tax cuts were stupid and the wars should not have been fought, but they did not get us in this mess.)
Ezra Klein gives us a graph from the Center on Budget and Policy Priorities that shows the ratio of debt to GDP from 2001 to 2019. The graph attributes the rise in the debt to various causes. The Bush tax cuts and the wars in Iraq and Afghanistan are shown to be major culprits.
There actually is a much better graph that people can use. This is the graph showing interest on the debt as a share of GDP.
Source: Congressional Budget Office.
Note that this one looks considerably less scary. We don’t get back to the same devastating interest burdens we faced in the early 90s until 2019. Yes folks, that was snark. Unless I’ve gone senile the interest burden we faced in the early 90s did not prevent us from having a decade of solid growth and low unemployment at the end of the period.
Am I pulling a fast one here by switching from debt to interest payments? Not at all. Suppose we issue $4 trillion in 30-year bonds in 2012 at 2.75 percent interest (roughly the going yield). Suppose the economy recovers, as CBO predicts, and the interest rate is up around 6.0 percent in 4-5 years. The federal government would be able to buy back the $4 trillion in bonds it had issued for roughly $2 trillion, immediately eliminating $2 trillion of its debt. This will make those who fixate on the debt hysterically happy, but will not affect the government’s finances in the least. It will still face the same interest obligation.
The point here is that the fixation on the debt by both parties has paralyzed economic policy so that tens of millions of people are now being needlessly forced to suffer the effects of unemployment. We need graphs that focus on the economy, not silliness that distracts from real issues in order to assign partisan blame. (Yes, the Bush tax cuts were stupid and the wars should not have been fought, but they did not get us in this mess.)
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The economics profession tends to be bipolar. It swings from periods of wild optimism to wild pessimism while rarely stopping anywhere in the mild. Hence we had the new economy optimists in the late 90s who insisted that all the problems of scarcity had been solved forever by the wonders of the information age. Now we have Paul Krugman citing new work by Robert Gordon which tells us that growth is dead.
Wow, that’s quite a shift in a relatively short period of time. Let’s back up a second.
First, we should distinguish between two diametrically opposite problems, too few jobs and too many jobs. We have a lot of people today concerned with the problem of too few jobs. This is because we can produce everything we are now consuming with somewhere close to 18 percent of the potential labor force unemployed, underemployed, or out of the labor force altogether. In this context, if we snapped our fingers and productivity fell everywhere by 10 percent, it could actually be a good thing. We would suddenly have more people employed.
Of course in a rational world there would be other ways to employ these people since there are certainly useful things that they could do. Alternatively, we could have everyone work fewer hours, which would also be a good thing. But our problem at the moment is clearly not one of inadequate productivity, our problem is too few jobs.
Some folks may recall seeing a NYT piece last week on the new generation of robots being deployed in factories. According to the article, these robots effectively have sight so they can do very detailed tasks that previously required human labor. Many readers of this piece reacted by expressing concern that we would have no need for workers in the future.
Those who expressed such concerns (which are in fact needless) should be cheered by Krugman’s column. Insofar as Gordon is right about slow productivity growth, the fears that a robotic revolution will displace tens of millions of workers will prove to be wrong. But seriously, is there any reason to believe that Gordon’s analysis is correct; that productivity growth will grind to a halt?
It’s hard to see if you take the step of looking at the places where people work. A bit less than 12 percent of our current workforce is employed in the retail sector. Are there no opportunities for productivity gains here? What about the self-service checkout counters that many stores have now? As the costs of these counters fall and wages of clerks rise (the response to a labor shortage — remember inadequate productivity growth means workers are in high demand), wouldn’t we expect to see these counters displace workers? How about robots in the stocking department? Will we never be able to design robots that can go up and down aisles after hours and restock the items that are in short supply? That seems unlikely.
Moving on, we have about 10 million workers, or 8 percent of the labor force, employed in restaurants. There aren’t possibilities for productivity gains there? Have you heard the word “cafeteria?” In our world of labor shortages we might expect that cafeterias will come to displace sit down restaurants as wages rise. I’m not scared yet.
We have about 11 percent of our workforce employed in health care. Are there opportunities for efficiencies there? How about if we adopted a universal Medicare system so that hospitals and doctors offices didn’t have to employ so many people in the payments department. Yeah, this is politically difficult, but that doesn’t mean that it is not economically possible.
In the same vein, we can probably reduce the 800,000 people employed in the securities and commodities trading sector (i.e. investment banking) by 50 percent with a modest financial speculation tax. This would hugely improve the efficiency of this sector with no cost to the economy. Again, the obstacle is powerful interest groups, not anything inherent to the economy’s potential for growth.
Manufacturing still employs more than 9 percent of the workforce. Presumably people do not need to be convinced that there are still opportunities for productivity gains in that sector.
Also, a major way that the economy experiences productivity gains is that demand switches to areas that achieve large gains from areas that don’t. This means that if we can’t improve the productivity of cab drivers, then we will likely see fewer people taking cabs in the future. They will instead spend their money on other things. And before we despair too much about the lack of productivity growth, remember we still have all those unemployed people who could be doing productive work, making us all richer.
There is a slightly different story that what Krugman, or at least Gordon, is telling. The problem would not be that in general we are suffering from an inability to increase productivity, but rather we will run into bottlenecks in the form of labor shortages for skills that are desperately needed. This can in principle impede growth.
The problem with this story is that there is zero evidence for any such shortage now (in what sector of the economy are wage growing rapidly?) and it is difficult to see a story where one develops in the future. What are the jobs for which we will be unable to train people or attract immigrants from India, China or elsewhere? It is difficult to imagine what that would look like.
My take away on this, as someone who was never a new economy optimist, is that with good economic policy we will be able to maintain solid rates of productivity growth over any time horizon that we can intelligently discuss. (Sorry folks, none of us knows anything about the 22nd century.) Let’s get the policy right and get people back to work.
The economics profession tends to be bipolar. It swings from periods of wild optimism to wild pessimism while rarely stopping anywhere in the mild. Hence we had the new economy optimists in the late 90s who insisted that all the problems of scarcity had been solved forever by the wonders of the information age. Now we have Paul Krugman citing new work by Robert Gordon which tells us that growth is dead.
Wow, that’s quite a shift in a relatively short period of time. Let’s back up a second.
First, we should distinguish between two diametrically opposite problems, too few jobs and too many jobs. We have a lot of people today concerned with the problem of too few jobs. This is because we can produce everything we are now consuming with somewhere close to 18 percent of the potential labor force unemployed, underemployed, or out of the labor force altogether. In this context, if we snapped our fingers and productivity fell everywhere by 10 percent, it could actually be a good thing. We would suddenly have more people employed.
Of course in a rational world there would be other ways to employ these people since there are certainly useful things that they could do. Alternatively, we could have everyone work fewer hours, which would also be a good thing. But our problem at the moment is clearly not one of inadequate productivity, our problem is too few jobs.
Some folks may recall seeing a NYT piece last week on the new generation of robots being deployed in factories. According to the article, these robots effectively have sight so they can do very detailed tasks that previously required human labor. Many readers of this piece reacted by expressing concern that we would have no need for workers in the future.
Those who expressed such concerns (which are in fact needless) should be cheered by Krugman’s column. Insofar as Gordon is right about slow productivity growth, the fears that a robotic revolution will displace tens of millions of workers will prove to be wrong. But seriously, is there any reason to believe that Gordon’s analysis is correct; that productivity growth will grind to a halt?
It’s hard to see if you take the step of looking at the places where people work. A bit less than 12 percent of our current workforce is employed in the retail sector. Are there no opportunities for productivity gains here? What about the self-service checkout counters that many stores have now? As the costs of these counters fall and wages of clerks rise (the response to a labor shortage — remember inadequate productivity growth means workers are in high demand), wouldn’t we expect to see these counters displace workers? How about robots in the stocking department? Will we never be able to design robots that can go up and down aisles after hours and restock the items that are in short supply? That seems unlikely.
Moving on, we have about 10 million workers, or 8 percent of the labor force, employed in restaurants. There aren’t possibilities for productivity gains there? Have you heard the word “cafeteria?” In our world of labor shortages we might expect that cafeterias will come to displace sit down restaurants as wages rise. I’m not scared yet.
We have about 11 percent of our workforce employed in health care. Are there opportunities for efficiencies there? How about if we adopted a universal Medicare system so that hospitals and doctors offices didn’t have to employ so many people in the payments department. Yeah, this is politically difficult, but that doesn’t mean that it is not economically possible.
In the same vein, we can probably reduce the 800,000 people employed in the securities and commodities trading sector (i.e. investment banking) by 50 percent with a modest financial speculation tax. This would hugely improve the efficiency of this sector with no cost to the economy. Again, the obstacle is powerful interest groups, not anything inherent to the economy’s potential for growth.
Manufacturing still employs more than 9 percent of the workforce. Presumably people do not need to be convinced that there are still opportunities for productivity gains in that sector.
Also, a major way that the economy experiences productivity gains is that demand switches to areas that achieve large gains from areas that don’t. This means that if we can’t improve the productivity of cab drivers, then we will likely see fewer people taking cabs in the future. They will instead spend their money on other things. And before we despair too much about the lack of productivity growth, remember we still have all those unemployed people who could be doing productive work, making us all richer.
There is a slightly different story that what Krugman, or at least Gordon, is telling. The problem would not be that in general we are suffering from an inability to increase productivity, but rather we will run into bottlenecks in the form of labor shortages for skills that are desperately needed. This can in principle impede growth.
The problem with this story is that there is zero evidence for any such shortage now (in what sector of the economy are wage growing rapidly?) and it is difficult to see a story where one develops in the future. What are the jobs for which we will be unable to train people or attract immigrants from India, China or elsewhere? It is difficult to imagine what that would look like.
My take away on this, as someone who was never a new economy optimist, is that with good economic policy we will be able to maintain solid rates of productivity growth over any time horizon that we can intelligently discuss. (Sorry folks, none of us knows anything about the 22nd century.) Let’s get the policy right and get people back to work.
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