Syverson on the productivity slowdown

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

Chad:

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

An interesting read throughout. 

[Except for that last sentence, a near parody of academic caution!]  

Lazear on Dodd-Frank and Capital

Ed Lazear has a nice WSJ oped, "How not to prevent the next financial meltdown." (Also available here via Hoover.) The main points will not be new to readers of this blog, or my much longer essay but the piece is admirable for putting the basic points so clearly and concisely.

The core problem of focusing on institutions not activities:

The theory behind so-called systemically important financial institutions, or SIFIs, is fundamentally flawed. Financial crises are pathologies of an entire system, not of a few key firms. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.

A crisis is a run:

The risks to a system are most pronounced when financial institutions borrow heavily to finance investments. If the value of the assets falls or becomes highly uncertain, creditors—who include depositors—will rush to pull out their money. The institution fails when it is unable to find a new source of funds to meet these obligations.

Nay, a crisis is a systemic run:

A bank’s inability to pay off its creditors can be transmitted to others. The mechanism can be direct: The debtor bank defaults, and its creditors cannot repay their creditors, etc. But the mechanism can be indirect. The suspicion that similar assets held by other institutions are subject to the same downward pressure can start a run at even an unrelated financial institution.

Ok, a minor disagreement here: The dominoes theory -- I fail, I don't pay you, you fail, you don't pay Joe, Joe fails, etc. -- is popular and enshrined in much Dodd-Frank rule making. It simply did not happen. Our financial crises are simultaneous runs, not failure dominoes. I fail, your investors see that and worry you might not pay them back, so they run, and so on. Companies do understand counterparty risk! And even small equity buffers multiply -- For a domino to go from A to E, A's losses must exceed all the combined equity of A, B, C, D, and E. Domino models tend to have large single counterparty exposures and no equity.  But, this is an oped, and it's a story widely told, so I can't blame Lazear for passing it on as a possibility.

The stability of equity:

consider the contrast between the 2008 financial crisis and the dot-com crash in the late 1990s and early 2000s.

The bursting of the dot-com bubble and subsequent failure of many Internet-based companies had serious repercussions for investors, but not for the financial sector. That’s because the failed firms were financed primarily through equity, not borrowed money. Investors took big losses when the value of tech companies fell precipitously. But there were no runs.

Floating-value liabilities also are run-proof:

Mutual funds are similar. Many are large and hold assets that may be risky, but they don’t fail when the value of their assets falls. The liabilities move one-for-one with the value of the assets because the fund does not promise to pay off any fixed amount to its investors. There is no reason for a run: Getting money out first serves no purpose to investors nor does withdrawal of funds cause significant distress. The fund simply sells the assets at the market price and returns that amount to investors.

Mortgage backed securities are fine -- if held long-only in investor's portfolios. It's funding MBS by rolling over overnight debt that causes problems.

The bottom line: equity financed investment and narrowly backed deposits

These factors suggest that instead of trying to divine which firms are systemically important, banks should be required to get a larger share of the funds they invest by selling stock. Bank investment funded by equity avoids the danger of a run: If the value of a bank’s assets falls, so too does the value of its liabilities. There is no advantage in getting to the bank before others do.

deposits—the checking and saving accounts that are bank liabilities—should be invested only in short-maturity secure assets, like Treasury bills.

Good news: These views seem to be taking hold. The people who run the regulatory agencies are pretty smart, they do listen, and they understand better than we do just how unworkable the plan is for them to make sure no big highly levered bank ever loses money again:

The Federal Reserve seems to be wising up, and may require higher equity capital for the SIFIs and place less emphasis on regulation

Additionally, the international Financial Stability Board announced on July 31 that it would set aside work on designating funds or asset managers as systemically important to focus instead on whether their activities or products were systemically important.

The last point is especially important. There has been a little noticed effort underway to designate asset managers as "systemically important." Asset managers buy and sell stocks on your behalf. There is no fixed value promise and no run here. But there is a chorus that worries the asset managers might all sell, herd, or otherwise act with behavioral biases and they need to be regulated as SIFI. If you understand that a crisis is a run, and that the government should not try to prevent any asset from ever losing value, you see this is not such a great idea.

Ben-Gad and the Minotaur

Michael Ben-Gad has a smashing review, "Into the Labyrinth", of Yanis Varoufakis' The Global Minotaur (Disclaimer: I have not read it and don't intend to.) It's a great piece of writing as well as a cogent analysis. Some excerpts:

"The idée fixe that dominates The Global Minotaur, and apparently dominated Mr Varoufakis’s squabbles with the other Eurogroup ministers of finance, is that some countries are inherently more productive than others and therefore always generate current account surpluses, while others always generate deficits, and fixed exchange rates or monetary unions only exacerbate this imbalance. Hence, for the world economy to function, the surpluses need to be recycled though a system of regular transfer payments from the core to the periphery.

Why do these imbalances emerge? According to the theory of comparative advantage as formulated by David Ricardo in the early 19th century, different countries specialise in the production of particular goods and then exchange them for others, and trade is mutually beneficial even if some countries are more efficient at producing all goods. Mr Varoufakis’s theory rejects all this. Instead, he argues, some countries are destined to specialise in the production of goods and services, while others on the periphery will forever specialise in consuming them. Put into layman’s terms, what this means is that the people of Germany, the Netherlands, and Finland produce cars, wooden clogs, or mobile phones and sell them to the people of Greece, who pay for it all with money – and to make this trade sustainable the cash needs to be regularly replenished in an endless loop by the people of Germany, the Netherlands, and Finland.

This is a story we hear quite often beyond Mr. Varoufakis -- that a currency union requires countries to be similar, with similar productivity. I'm glad to see it so effectively skewered. In Ricardo's famous example, Portugal sells wine to Britain, which sells wool to Portugal, even if one is better at both than the other. They were on a common currency, gold.

On predictable US-bashing:

In Mr Varoufakis’s world the biggest villains are companies such as Walmart that exploit their efficiency to immiserate communities by making them pay less And of course the worst thing about Walmart is that it is American.

....Apparently, between the end of the war and the collapse of the Bretton Woods agreement in 1973, the Americans had a global plan, helpfully labelled ‘the global plan’, to dominate the world by permanently running current account surpluses and paying down its debt. Then this ended and was replaced by a new global plan to dominate the world by running permanent current account deficits and letting its debt soar. Devious Yanks. 

This last paragraph gets the golden skewer award for prose.

First,  he would have all remaining government debts still owed to banks written off. Why? Well, everyone hates banks, and it is apparently a neoliberal myth that their shares are owned by pension funds, university endowments or just ordinary people saving for retirement. Banks are really owned by Bond villains who live underneath hollowed-out volcanos.

Second, a substantial part of the remaining debt – about 60 per cent of GDP – would be mutualised across the eurozone so that, whenever the spirit moved them, governments could costlessly default on their bond payments, each one safe in the knowledge that any repudiated debt would immediately become an obligation for the taxpayers in the 18 remaining countries – unless, of course, they defaulted first. This is a variation on the prisoner’s dilemma game, but on steroids. 

Oh, I give up, just go read the whole thing.

Then read his equally good review of Thomas Pikettty, from a year ago, which starts

Reading Thomas Piketty’s Capital in the Twenty-First Century from front to back was a mistake.

Better to read the last hundred pages first, with their recommendations for the confiscation of wealth and marginal income tax rates nearing 100 per cent, and then read the preceding 470 pages to decide whether the flimsy evidence, conjecture and questionable theories the author offers justify such draconian measures....

Noah Smith Writing Lesson

Source Noah Smith

Noah Smith has a good review of the writing in Deirdre McCloskey's review of Thomas Piketty's book.

A lesson for students learning to write papers: Don't needlessly annoy readers before you get to your point. If a reader disagrees, finds something wrong, or insufficiently documented, of if you offend a reader, he or she will leave without getting to the main point.  Once a reader finds one thing he or she thinks is wrong, he or she will distrust the rest of the argument. Grand methodological statements and criticisms of swaths of literature are especially dangerous.

Noah's post is a great example. As you can see, Noah never got to the main point of McCloskey's review, and happily admits it.

And Noah's criticisims are spot on.  The first four pages of McCkoskey's review are full of grand, outrageous, and arguably false statements, having nothing to do with Piketty, inequality, or anything else that follows.  McCloskey, author of a splendid essay on writing in economics, should really have known better.  My review said as much too. Interestingly, I quoted quite a few of the same points Noah found.  (I put that at the bottom of a "too-long post on a far-too-long review of a enormously-too-long book" because  my main point was not about writing and for once I followed my own advice and put the secondary point at the bottom.)

So, dear students, learn the lesson: write the minimum up front needed to make your main point later. If you think everyone runs too many regressions, or you don't like non-cooperative game theory, and unless this point is absolutely necessary to your criticism of Piketty, save it for another day. Only offend people you really really need to offend. Otherwise, you risk having a potential reader like Noah give up in disgust before he gets to your point. Noah, hold your nose and plow on, it gets better.

Adam Davidson on Immigration

Illustration by Andrew Rae, source New York Times

Adam Davidson has a very nice New York Times Magazine article, "Debunking the Myth of the Job-Stealing Immigrant", in favor of "radically open borders."

Here's how a top professional journalist and writer puts together the central argument, so much more cleanly than I can do it:

So why don’t we open up?

The chief logical mistake we make is something called the Lump of Labor Fallacy: the erroneous notion that there is only so much work to be done and that no one can get a job without taking one from someone else. It’s an understandable assumption. After all, with other types of market transactions, when the supply goes up, the price falls. If there were suddenly a whole lot more oranges, we’d expect the price of oranges to fall or the number of oranges that went uneaten to surge.

But immigrants aren’t oranges. It might seem intuitive that when there is an increase in the supply of workers, the ones who were here already will make less money or lose their jobs. Immigrants don’t just increase the supply of labor, though; they simultaneously increase demand for it, using the wages they earn to rent apartments, eat food, get haircuts, buy cellphones. That means there are more jobs building apartments, selling food, giving haircuts and dispatching the trucks that move those phones. Immigrants increase the size of the overall population, which means they increase the size of the economy. Logically, if immigrants were “stealing” jobs, so would every young person leaving school and entering the job market; countries should become poorer as they get larger. In reality, of course, the opposite happens.

Most anti-immigration arguments I hear are variations on the Lump of Labor Fallacy. That immigrant has a job. If he didn’t have that job, somebody else, somebody born here, would have it. This argument is wrong, or at least wildly oversimplified. But it feels so correct, so logical. And it’s not just people like my grandfather making that argument. Our government policy is rooted in it.

The single greatest bit of evidence disproving the Lump of Labor idea comes from research about the Mariel boatlift, a mass migration in 1980 that brought more than 125,000 Cubans to the United States. According to David Card, an economist at the University of California, Berkeley, roughly 45,000 of them were of working age and moved to Miami; in four months, the city’s labor supply increased by 7 percent. Card found that for people already working in Miami, this sudden influx had no measurable impact on wages or employment. His paper was the most important of a series of revolutionary studies that transformed how economists think about immigration. Before, standard economic models held that immigrants cause long-term benefits, but at the cost of short-term pain in the form of lower wages and greater unemployment for natives. But most economists now believe that Card’s findings were correct: Immigrants bring long-term benefits at no measurable short-term cost.

Needless to say the "lump of labor" fallacy pervades politics, policy, and popular discussion on more than immigration. But Adam doesn't bother with the 100 other fallacies.

A beautiful stylistic choice: Adam's antagonist is ... his grandfather. That lets Adam have an anonymous, sympathetic antagonist, who is slowly changing his mind in Adam's favor. Adam doesn't have to pick on a particular individual or set of individuals with complex opinions; he doesn't resort to the horrible vague antagonist, "some think;" and he avoids the usual partisan politics and vilification of so much political blogging and editorial writing.

Students: notice concrete not abstract words. "Using the wages they earn to rent apartments, eat food, get haircuts, buy cellphones."  Not "Using earned income to demand goods and services."