Posts Tagged ‘growth’

superstar firms and unemployed workers

Sunday, May 21st, 2017

Tim Harford, ‘undercover economist’ for the FT, has written a very interesting column on the unintended consequences of technological change. Increased productivity should be welcomed by all of us. The problem is that some of us suffer, while others gain. An equitable distribution of gains will not happen with markets alone. Government action is needed. (more…)

official statistics and China’s GDP growth

Monday, April 24th, 2017

China’s official GDP estimates are distrusted by many, who think that the government is overstating the country’s true rate of economic growth. Columbia University’s Xavier Sala-i-Martin teamed up with two economists from the New York Fed (Hunter Clark and Maxim Pinkovskiy) to examine satellite data on variation over time of nighttime light emissions – a proxy for GDP growth. They find that the official statistics on average do not overstate China’s growth rate; in fact, in recent years they understate it.

For analysts of the Chinese economy, questions about the accuracy of the country’s official GDP data are a frequent source of angst, leading many to seek guidance from alternative indicators. These nonofficial gauges often suggest Beijing’s growth figures are exaggerated, but that conclusion is not supported by our analysis, which draws upon satellite measurements of the intensity of China’s nighttime light emissions—a good proxy for GDP growth that is presumably not subject to whatever measurement errors may affect the country’s official economic statistics. ….

The chart below presents the path of official Chinese GDP growth alongside our modified Li Keqiang Index (with the weights determined by the nighttime lights regression). We place a 95 percent confidence interval around our prediction.

Is Chinese Growth Overstated?

Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin, “Is Chinese Growth Overstated?“, Liberty Street Economics, 19 April 2017.

The authors’ full working paper on which this article is based, “China’s GDP Growth May be Understated” (NBER No. 23323, issued in April 2017), can be downloaded here.

rise of the robots

Sunday, April 23rd, 2017

Technological change in general is a good thing. After all, it means that we can produce more output with fewer hours of work, giving us more leisure and more goods to consume. Nonetheless, for some individuals, the change can be stressful. Workers may find themselves unemployed, or underemployed, unable to adjust to a changing job market. Leisure is not very pleasant when it comes in the form of involuntary unemployment with less income. (more…)

in praise of messiness

Saturday, October 8th, 2016

Undercover Economist Tim Harford explains why highly performing office workers tend to be messy pilers rather than neat filers.

Filers like to establish a formal organisational structure for their paper documents. Pilers, by contrast, let pieces of paper build up around their desks or, as we have now learnt to say, implement an LRU-cache.

To most of us, it may seem obvious that piling is dysfunctional while filing is the act of a serious professional. Yet when researchers from the office design company Herman Miller looked at high-performing office workers, they found that they tended to be pilers. They let documents accumulate on their desks, used their physical presence as a reminder to do work, and relied on subtle cues — physical alignment, dog-ears, or a stray Post-it note — to orient themselves. ….

[Benjamin] Franklin was a messy fellow his entire life, despite 60 years of trying to reform himself, and remained convinced that if only he could learn to tidy up, he would become a more successful and productive person. But any outsider can see that it is absurd to think such a rich life could have been yet further enriched by assiduous use of a filing cabinet. Franklin was deluding himself.

Tim Harford, “There’s magic in mess: why you should embrace a disorderly desk“, Financial Times Magazine, 8 October 2016 (metered paywall).

There is much more in the full article, which is based on Tim Harford’s latest book, Messy: The Power of Disorder to Transform Our Lives (Riverhead/Little, Brown, 2016).

You can also hear Mr Harford discuss this topic with Cariff Garcia in an FT business and economics podcast:

Tim Harford joined me to discuss his latest book, Messy: The Power of Disorder to Transform Our Lives. This was a deeply engaging and fun conversation. Messy is the best longform manifestation yet of Tim’s knack for revealing counterintuitive truths, using social science and original interviews to find the underlying sense in our lives that we often fail to see — and thus fail to appreciate. ….

[F]or the text-only crowd, click below to open a PDF transcript of our chat.

Cardiff Garcia, “Alphachat: Tim Harford on the unheralded virtue of messiness“, FT Alphaville, 8 October 2016 (unmetered access for all FT blogs and podcasts – free registration required).

Alphachat is also available on Acast, iTunes and Stitcher.

Bourgeois Dignity

Sunday, July 31st, 2016

An unusual feature of Deirdre McCloskey’s book, Bourgeois Dignity, is the chapter headings which provide a concise summary of the argument of the book. Few books have impressed me so much.

The volume contains 450 pages of text, so each chapter is roughly 10 pages long. In addition there are 42 pages of endnotes, 41 pages of references and a useful 37-page index.

You can read the entire first chapter (pp. 1-9) here. Below is the complete table of contents.

1   The Modern World Was an Economic Tide, But Did Not Have Economic Causes.
2   Liberal Ideas Caused the Innovation
3   And a New Rhetoric Protected the Ideas.   
4   Many Other Plausible Stories Don’t Work Very Well.   
5   The Correct Story Praises “Capitalism.”   
6   Modern Growth Was a Factor of at Least Sixteen.    
7   Increasing Scope, Not Pot-of-Pleasure “Happiness,” Is What Mattered,   
8   And the Poor Won.    
9   Creative Destruction Can Be Justified Therefore on Utilitarian Grounds.   
10   British Economists Did Not Recognize the Tide,   
11   But the Figures Tell.   
12   Britain’s (and Europe’s) Lead Was an Episode,    
13   And Followers Could Leap over Stages.    
14   The Tide Didn’t Happen because of Thrift;    
15   Capital Fundamentalism Is Wrong.    
16   A Rise of Greed or of a Protestant Ethic Didn’t Happen;
17   “Endless” Accumulation Does Not Typify the Modern World.   
18   Nor Was the Cause Original Accumulation or a Sin of Expropriation.   
19   Nor Was It Accumulation of Human Capital, Until Lately.    
20   Transport or Other Domestic Reshufflings Didn’t Cause It,   
21   Nor Geography, nor Natural Resources;   
22   Not Even Coal.    
23   Foreign Trade Was Not the Cause, Though World Prices Were a Context,   
24   And the Logic of Trade-as-an-Engine Is Dubious,   
25   And Even the Dynamic Effects of Trade Were Small.    
26   The Effects on Europe of the Slave Trade and British Imperialism Were Smaller Still,
27   And Other Exploitations, External or Internal, Were Equally Profitless to Ordinary Europeans.   
28   It Was Not the Sheer Quickening of Commerce    
29   Nor the Struggle over the Spoils.   
30   Eugenic Materialism Doesn’t Work;
31   Neo-Darwinism Doesn’t Compute;    
32   And Inheritance Fades.
33   Institutions Cannot Be Viewed Merely as Incentive-Providing Constraints,   
34   And So the Better Institutions, Such as Those Alleged for 1689, Don’t Explain,
35   And Anyway the Entire Absence of Property Is Not Relevant to the Place or Period   
36   And the Chronology of Property and Incentives Has Been Mismeasured,    
37   And So the Routine of Max U Doesn’t Work.
38   The Cause Was Not Science,   
39   But Bourgeois Dignity and Liberty Entwined with the Enlightenment.   
40   It Was Not Allocation:   
41   It Was Words.   
42   Dignity and Liberty for Ordinary People, in Short, Were the Greatest Externalities,
43   And the Model Can Be Formalized.   
44   Opposing the Bourgeoisie Hurts the Poor,    
45   And the Bourgeois Era Warrants Therefore Not Political or Environmental Pessimism   
46   But an Amiable, if Guarded, Optimism.   

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. vii-ix.

 

low interest rates

Sunday, July 31st, 2016

Nominal interest rates on secure debt, such as long-term government bonds, are now very low, even zero or negative in some countries. Economists prefer to look at real interest rates (nominal rates less inflation), which are more informative. After all, nominal rates might be very high, but if inflation is even higher, the return is negative for those who purchase bonds.

Cuban-American economist Carmen Reinhart looks at real interest rates in advanced economies over time, and finds that bouts of negative real rates have been common for more than a century. What is novel is deflation (falling prices), which requires negative nominal rates to produce the negative real rates central banks seek in order to stimulate growth.

[The chart below] shows that the 2010-2016 period is not the first episode of widespread negative real returns on bonds. The periods around World War I and World War II are routinely overlooked in discussions that focus on deregulation of capital markets since the 1980s. As in the past, during and after financial crises and wars, central banks increasingly resort to a form of “taxation” that helps liquidate the huge public- and private-debt overhang and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. Today, this means consistent negative real interest rates – equivalent to an opaque tax on bondholders and on savers more generally.

So if a prolonged period of low and often negative real interest rates is not unprecedented, where is the novelty? More often than not, negative real rates were accompanied by higher inflation (as during the wars and the 1970s) than what we observe today in the advanced economies. Even when average inflation was modest (as in the 1950s and 1960s), it was still more volatile.

In the 1930s, in the midst of economic depression and sharp deflation, US Treasury bills sometimes traded at negative yields (and real returns were still positive). In today’s low-inflation or outright deflationary environment, central banks may need negative policy rates (this is the novelty part) to produce negative real rates. In the eurozone and Japan, taxing banks that hold reserves (negative-interest-rate policy) will also encourage more bank lending, and thus stimulate growth.

Carmen Reinhart, “What’s New About Today’s Low Interest Rates?“, Project Syndicate, 28 July 2016.

There is much more in the full column. Carmen M. Reinhart (née Castellanos, 1955) is on the faculty of the Harvard Kennedy School. She co-authored (with Kenneth Rogoff) This Time is Different: Eight Centuries of Financial Folly, published by Princeton University Press in 2009.

advanced economies with negative long-term interest rates

perverse effects of education

Sunday, July 31st, 2016

I have completed McCloskey’s remarkable book, and will continue to post short excerpts that caught my attention. Here is the first of several to follow.

Each of the book’s short chapters made me think, and some made me wish that I had written the words, or at least something similar. This excerpt is from chapter 43, the only chapter of the book that contains a formal model of economic growth. As McCloskey explains, on p. 411, “The ‘mathematics’ is merely a metaphorical language that economists understand, and which allows me to chat with them … without excessive confusion.”

[The effect of education] can be and often has been perverse, corrupting good bourgeois boys by educating them to believe that the bourgeoisie have no dignity at all, or corrupting good bourgeois girls to become state bureaucrats devoted to believing that bourgeois liberty is to be stamped out. Marx took a PhD degree in philosophy at Jena in 1841. The leader of the Shining Path Marxists in Peru was a professor of philosophy. A high percentage of the officers in Hitler’s SS had advanced degrees in the humanities. German engineers built the gas chambers. Excellent computer engineers enforce the Chinese censorship of the Internet.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), p. 417.

I encourage you to visit Professor McCloskey’s web page, where you can download many of her diverse writings (though not this book!).

liberal policies and economic growth

Friday, July 29th, 2016

For your enjoyment, here are more excerpts from Bourgeois Dignity.

Dignity and liberty still work. …. Shenzhen in mainland China, a suburb of Hong Kong, went from being a small fishing village to an eight-million-soul metropolis in two decades. it didn’t happen without some nasty rent-seeking by party officials and their friends, true. But out of such creative destruction are average incomes raised, to the benefit eventually of the poorest. Such a shift required a shift in rhetoric: stop jailing millionaires and start admiring them; stop overregulating markets and start letting people make deals, corrupt or not.

…. You can still hear people … [declare] confidently that the market of course needs to be closely regulated, or that trade needs to be fair, or that immigration must be restricted, or that jobs are to be created by governmental programs, or that businesspeople routinely cheat, or that markets are chaotic, or that the more complex an economy is, the more it needs government regulation, or that banking or financial speculation is robbery, or that governmental bureaucracies are always fair and efficient.  …. Such antibourgeois people … do not believe the bourgeois axiom that a deal between two free adults has a strong presumption in its favor ….

This seems to be extremely libertarian, but five pages later, McCloskey explains that she is very much a classical liberal (a follower of Adam Smith, John Stuart Mill and others):

Liberty, I say again for the enlightenment of my libertarian colleagues, does not by itself suffice. The political scientist James Otteson asserts … “Those countries that respect private property and efficiently administer justice prosper, and those that do not do not. It is as simple as that.” Not quite, I would argue …. Prudence is not enough. We need to assent to bourgeois virtues.

Two chapters later McCloskey affirms this even more clearly:

[We should not celebrate] “greed is good,” which I argued at length in [my book] The Bourgeois Virtues is a childish and unethical rhetoric, however popular it has been on Wall Street and in the Department of Economics.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 397, 402, 446.

science and economic growth

Thursday, July 28th, 2016

Like imperialism and trade, science was more a result of economic growth than a cause.

All this remains to be shown …. But understand the main point here: even today … a great deal of economic growth in a country has little or nothing to do with science. The spread of economic growth to places like Brazil or Russia or India or China uses some science-based technologies, such as cell phones, but uses also a great many merely technology-based technologies free of much input from science …. And the international spread of growth has intensively used the social “technology” of bourgeois dignity and liberty.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 360-361.

Surprised? (I was.) Not convinced? Before rejecting McCloskey’s thesis read all ten pages of chapter 38 (“The cause was not science”), pp.355-365 or, better yet, read the entire book.

thoughts on economic models

Sunday, July 10th, 2016

A typical, very simple economic model is a demand curve, Dx = f(Px). It states that, other things equal, an increase in the price of x will result in a decrease in demand for x. I other things are not equal, the assumptions of the model do not hold. Suppose, writes blogger Arnold Kling, that x stands for tuition charged by a school, and we observe that demand went up rather than down when tuition increased. What may have happened is that scholarships became more generous, so the full tuition – net of student aid – fell. Other things did not remain equal.

Most economic models contain more variables. Consider the aggregate production function X = f(K,L). The quantity of output is a function of the quantity of physical capital plus the quantity of labour.

[This model] is used to predict that differences in output per worker will be proportionate to differences in capital per worker. When this fails, there are many possible reasons: workers may differ in their human capital; physical capital may not be measured or aggregated correctly; output may not be measured or aggregated correctly; institutional differences may matter. etc.

In fact, the primary use of the aggregate production function model is to examine its failure, which is called “the residual.” Economists place an interpretation on this residual, calling it “total factor productivity.” They interpret the rate of change in this residual over time as “productivity growth.” They interpret the change in the rate of change in this residual as “change in the trend rate of productivity growth.”

Arnold Kling, “Thoughts on the use of Models in Economics“, askblog, 9 July 2016.

Arnold’s explanation of how economists use models is useful, but I think he is too easy on model-building. It is very difficult – probably impossible – to measure output, labour and capital without using prices. This is necessary, because if prices are used, the model becomes close to a tautology. The value of the quantity demanded, for example, is always equal to the value of the quantity supplied (plus or minus abnormal profits or losses). Similarly, the value of output is equal to the cost of the rental of machines plus the wages of labour (adjusted for any abnormal profit or loss).

Think how difficult it is to measure (without prices!) the heterogeneous output of a factory, or the hours of equivalently productive workers. Physical capital is even more difficult to measure. Without prices or interest rates, what is the unit of measure. Kilos of capital? Number of shovels, hammers or machines?

Economic models are helpful, but only as toy models, useful for understanding, but not predicting, how a real economy functions.

See here for past posts on production functions.