From the comments — on dynamism

by on June 15, 2013 at 3:22 am in Data Source, Economics, Uncategorized | Permalink

Responding to this link, Ryan writes:

I think the secular decline in various measures of dynamism is a pretty important topic, largely because we haven’t been able to figure out what’s causing it. We’re seeing it not only in worker flows but also job flows, migration, startup rates, etc.

Industry composition effects make the puzzle even bigger–retail and services are typically more volatile than manufacturing, so the larger employment share they’re seeing means we should expect to see HIGHER rates of churning rather than lower (see http://updatedpriors.blogspot.com/2013/02/job-flows-industry-composition-and.html).

One thing that DOES help explain secular declines in gross flows is firm age stuff. Startup rates and employment shares among young firms are on secular decline (see http://updatedpriors.blogspot.com/2012/12/startups-and-great-recession.html); since dynamism typically declines as you go up through the age classes, lower young-firm activity means we should expect lower flows. But it’s not clear that this is a sufficient explanation; and, more importantly, it’s only explanatory in an accounting sense. We don’t know why entry is declining. And this is a secular trend, so common political explanations may not work.

Whether we should be worried really depends on what is causing all of this. After all, churning is costly. If churning is declining for good reasons, we should applaud it. But that may not be the case.

1 Cimon Alexander June 15, 2013 at 4:57 am

Maybe the aging population is as important as aging firms.

2 Ryan June 15, 2013 at 10:23 am

Good point, and I think you’re probably right.

3 prior_approval June 15, 2013 at 6:18 am

The lack of essentially universal health care in America comes immediately to mind as a simple explanation for many of the things described a decline in dynamism. Pretty much the rest come be explained through real estate busts, starting with regional ones in the 90s to the national one of the later 2000s.

But generally, we don’t like explaining any of America’s broader economic problems as being related to health care. Makes one wonder how dynamic Canada and Australia have been over the last 20 years in comparison.

4 Jody June 15, 2013 at 8:08 am

Citing a constant to explain a variable seems a bit off to me.

5 Lee A. Arnold June 15, 2013 at 11:26 am

Because the cost of healthcare is increasing while median income has almost flatlined, citing healthcare as a constant seems a bit off to me.

6 Jody June 15, 2013 at 4:33 pm

So in the US, universal health care would imply lower costs?

And what segment of the population consumes the vast majority of health care? Would you say that’s a naturally dynamic segment?

7 Lee A. Arnold June 15, 2013 at 5:40 pm

No, it would imply less risk to entrepreneurial failure, ergo, more people taking startup risks.

8 Lee A. Arnold June 15, 2013 at 5:42 pm

As for the segment consuming the vast majority of healthcare, that represents a market opportunity. Thus, make sure they can effectuate their demand.

9 Lee A. Arnold June 15, 2013 at 6:03 pm

Insofar as U.S. healthcare insurers are taking 20% for what is essentially an accounting function that is really only worth Medicare’s 1-2% overhead, universal healthcare ought to represent an 18-19% cost savings, although that is likely to be used to cover those who cannot afford coverage.

10 Duracomm June 15, 2013 at 11:24 am

There had been plenty of dynamism without government healthcare. That fact effectively refutes the argument that lack of government healthcare is decreasing dynamism.

In fact the regulatory bloat caused by ever increasing government involvement in healthcare is likely one of the causes of decreasing dynamism.

This combined with the increasing non healthcare related regulatory bloat (which also makes it more difficult to start businesses) provides a much more plausible explanation for the decline in the rate of startups.

11 derek June 15, 2013 at 11:48 am

Not very. The dynamic Canadians usually moved south to jurisdictions more welcoming of their ideas.

I find what you said odd. You are proposing a hothouse, controlled environment where stresses and isolation from failure are supposed to generate dynamism, new ideas, solutions to problems, etc. I suspect that it will engender less.

12 anon June 15, 2013 at 6:55 am

A wealthy society, easy credit, affluenza, credentialism, decadence. Not necessarily in that order.

13 Marie June 15, 2013 at 10:32 am

Excellent list, applicable to many issues, in different orders.

14 anon June 15, 2013 at 11:26 am

Add in several generations of people who have sat (mostly) quietly in classrooms and been trained and socialized to seek “good grades” and approval for conforming, plus the idolization of academic credentials, and it is no surprise that so many of us can only think about “jobs” (i.e., working for someone else, usually a large organization) rather than working for our selves.

The disdain (and pity) many educated people have for blue collar workers and tradesman is evident by credentialed people who do not understand why bright kids don’t automatically want to go to college, much less “the best college”. (Only a sucker runs her own business or works for herself or does manual work.) This appears to be especially true in DC and on the east coast.

Since the political class and most pundits (and academics) are almost all college graduates who have never owned or run a small business or done manual labor as an adult, it is no surprise that the “solutions” proffered tend to focus on more of the same that they are familiar with.

And because we have now had several generations where big org job compensation includes health insurance and auto deduction of taxes from pay and matching by the employer of social security tax, it should be no surprise that many of us can not imagine buying our own health insurance and paying our taxes on a quarterly basis.

15 Marie June 15, 2013 at 2:21 pm

There is enormous cultural kickback against small businessmen, despite our idealization of them in our propaganda.

I think you have to factor in that element — people like to be respected by their family and their community. The man who institutes a local bank down the street and employs thirty people while serving his neighborhood is likely to be considered down dog compared to his peer who manages a division in the EPA in the state capitol, or has a title with a corporation that has a recognizable brand name. “Owner, founder” has much less cache than “Executive Vice President”.

16 Curt F. June 15, 2013 at 8:08 am

What is the proper *level* of dynamism? The original linked post has a graph that shows *changes* in dynamism over time. Apparently Nevada has “receded” most in the dynamism category. But what is the actual level of dynamism in NV compared to say Mississippi? Should we be trying to draw policy implications from only data on relative changes? What data should we look at to decide whether a given level of dynamism to is too high?

17 Becky Hargrove June 15, 2013 at 8:24 am

In order for governments to safely continue cutting back on their services in the future – they will also have to ease way back on the restrictions on economic access and other privileges previously given to so many sectors, which reduced dynamism over time in the first place. That goes double for the restrictions on knowledge use, especially as more schools continue to be consolidated in the countryside, and physicians elects to practice primarily in well to do areas.

Plus, even cities which do relatively well (treading water?) can only hire so many from the countryside who would seek work in those cities, especially in their young adult years. But when such individuals have to remain in rural areas, little work is there for them. That makes it doubly dangerous for the ones left behind in the country as governments continue scaling back on services.
http://monetaryequivalence.blogspot.com/2013/06/where-weve-lived-affects-our-economic.html

18 Becky Hargrove June 15, 2013 at 1:19 pm

Today’s “take” on dynamism is a bit more optimistic!
http://monetaryequivalence.blogspot.com/2013/06/dreams-and-other-pragmatic-realities.html

19 Ashok Rao June 15, 2013 at 9:06 am

In the many discussions of labor market health recently, this comment struck me as the most insightful: “Whether we should be worried really depends on what is causing all of this. After all, churning is costly. If churning is declining for good reasons, we should applaud it. But that may not be the case.”

Implicit, somewhere in there, is that the very way we measure dynamism (churn) is changing. They say Internet is not seen in the productivity statistics, and all true, but I think the real effect of the Internet is turning the whole world into a city as far as economic (but not social) agglomeration effects are concerned. If you read a lot of the “complex systems” agglomeration theory, the idea comes from superlinearity in interactions generating more creative output, as well as violence. All of this scales as predicted by theory across most cities.

Isn’t Twitter just that? Dynamism is changing completely at the top of the ladder (“rise of the supertemps”) and the bottom, and slowly moving its way into the middle. Tyler talked a week ago about the coming “reset”, part of that is the to-be irrelevance of the very basic labor market indicators.

This is a good thing, because mass unemployment will be a greater paradox than it already is. (http://bit.ly/11nJmbY)

20 derek June 15, 2013 at 9:38 am

Hasn’t the goal of the Fed, the economist profession and government policy (encouraged by lobbyists, unions and voters) been purposely to prevent dynamism? The source of dynamism is failure. The strength of capitalism is failure. By putting in place barriers to entry, by attempting to smooth out the business cycle, by rewarding losers. It is working as designed.

21 anon June 15, 2013 at 10:35 am

No.

22 anon June 15, 2013 at 11:29 am

The source of dynamism is failure.

+1

Free markets and innovation are all about failure. Failure is how must people learn.

23 anon (the no-one) June 15, 2013 at 12:01 pm

allowing for micro failure not same as macro failure … person-level ‘business cycles’ more bearable than economy-level ones, then many can be punished for failure of a few. chaos is not dynamism.

24 derek June 15, 2013 at 1:54 pm

You want punishment be held back in a system where punishment is the only thing that is effective.

Macro events create macro consequences, like what happened in 2008. An industry that was too large and too expensive for the market it was serving, or not serving at all as we have found, was corrected severely, in proportion to it’s excesses. We saw a moment in late 2008 where the financial system instead of being a political driver of agendas, was vulnerable and needy. A good place for any industry to be in. The market had decided what it was worth, and it was a hell of alot less than what it said it was worth the previous week.

But because of the desire to prevent macro downturns, they got billions of dollars from the Treasury, and trillions of backing from the Fed. Now, as DeLong says, they are not capable of providing safe assets to investors. And we wring our hands about the lack of dynamism in the economy. Any sensible person would conclude that placing themselves in the stream of money going into and out of the Fed or Treasury, even a couple basis points worth, is far easier and far more profitable than trying to figure out how to design and build something that people want to buy, in a competitive economy.

I’ll predict something. The US will never recover from the mistake it made in 2008, just as Japan will never recover from the mistake it made and continue to make 20 years ago.

25 Marie June 15, 2013 at 2:33 pm

In a properly configured free market economy there should be no opportunities for macrofailures, or for rescuing the economy from them. If the U.S. can’t recover from it’s mistake of 2008, it won’t be the mistake of 2008 that drove the decline, but the mistakes that made a decision (one way or the other) in 2008 necessary.

Dynamism has, indeed, been selected against by our culture as implemented by our government policies and our consumer choices. Monopolies and a government-driven economy feel safer to everyone, until they don’t. “In the long run, we’re all dead” appeals perfectly to an ADD society like our current one.

26 mike June 15, 2013 at 4:22 pm

Great comment by derek. I would just add one thing – the “mistake made in 2008” was a highly significant event in an unbroken series of mistakes made by the United States (and most other first-world countries) since approximately the 1960s, all with the same desire: to deny certain uncomfortable realities and make the world appear to be the way we wish it was. Throughout the past half century, we have had the means to do so temporarily. We may not for much longer. I have no idea how much longer we can continue this “extend and pretend” scheme that is propping up the United States and the EU, but does anybody think this can go on forever?

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