*Fully Grown: Why a Stagnant Economy is a Sign of Success*

That is the new book by Dietrich Vollrath, strongly recommended, it is a primer on the current state of knowledge about economic growth.  Tightly argued, and a remarkable amount is covered in 216 pp. of regular text.  Here is one excerpt:

Although there were plenty of changes in the individual markups firms charge, many of them actually fell over the last twenty years.  What explained the overall rise in markups from 1.18 to 1.67 was that spending shifted away from firms with low markups and toward firms with high markups.  Which high markup firms did we shift our spending to?  Well, a lot of service firms, including those involved in communications, technology, health care, and education.  In short, the rise in economic profits and markups we see at the aggregate level is part of the overall shift toward services we discussed a few chapters ago.

Here is where things get a little weirder.  Baqaee and Farhi show that the shift toward high-markup firms was good for productivity growth.  Whatever the source of a high markup, it indicates a product that is very valuable relative to its marginal cost.  If we take the inputs required to produce a low-markup product and use them to instead produce a high-markup product, then we have raised the value of what we produce.  As this increase in value came from reallocating our existing inputs toward a different use, rather than from accumulating new physical or human capital, the shift in spending toward high-markup firms shows up as an increase in productivity growth.

More books should be like this, it actually tries to teach the reader something!  And succeeds.  Definitely recommended.  Due out in January, you can pre-order here.

Comments

'If we take the inputs required to produce a low-markup product and use them to instead produce a high-markup product, then we have raised the value of what we produce.'

Let them eat silicon, right?

Except isn't the fantastic drop of price in semiconductors over decades considered an example of how mark-ups fell as semiconductors became a commodity product?

(And considering that there were two typos in the quoted text, one assumes that a high value copy editor - or just a low margin spell check program, for that matter - is still in the works.)

That appears not to be the case.
https://www.macrotrends.net/stocks/charts/INTC/intel/gross-margin

The fantastic drop in the price of semiconductors unsurprisingly relates to the fantastic drop in the cost of producing them.

Well, there is a bit more than merely price involved in the comparison - what is the comparison in performance between a 386 chip and a modern Intel CPU, and how many 386s would you need to buy to get today's performance?

This is an interesting benchmark site - https://3dfmaps.com/CPU/cpu.htm

Intel i7 6700K 4.00GHz (Intel Fortran XE 2015 x64) 0.06 seconds

Intel 386/20 w 387 (NDP FORTRAN v 1.4) 595.00 seconds

So, I would need roughly 10,000 basic 386 chips to match one I7 (as a very rough and simplified number). Is Intel charging even 10 times as much for an i7 as a 386? Looking around, it seems that i7 is around 300 dollars.

It's interesting to think about this as an example of an improvement that has a large impact but isn't easily captured in economic measures.

However, Moore's Law isn't relevant to markup, is it?

If the same performance level costs .000001% of what it did decades ago, but in each case the manufacturer is selling the chips for 20% more than their cost, then markup would be the same, right?

'then markup would be the same, right?'

As noted below (and apparently further discussed), it is not just a question of markup in isolation, as noted by thinking about IBM.

I prefer to watch European football compared to the American version of it. Theirs is just too burly and unrefined for my taste in sports.

Intel, for example, does not stand still, but constantly attempts to shift it’s business to the next high markup product.

Sure, but it has had a lot of problems adapting to the ARM/mobile world. High markup in a shrinking (or even just stagnant) market is not a good way to grow profits over the long term.

Just ask IBM.

Except Intel has been failing at that. They couldn't compete with GPU manufacturers in the profitable cryptocurrency and AI/ML segment. They struck out on mobile (losing to ARM) and on smartphone modems (lost to Qualcomm and then sold division to Apple). Amazon, Apple, Facebook and Google are all designing/fabbing their own chips for their own specialized applications. Heck even Tesla makes their own chips! With AMD's new Ryzen chips, Intel is now seeing a threat to their bread and butter desktop/server segment. As a Big Tech company, I just don't see the premium justifying the value add of having Intel in my datacenters or products. Better to just buy 10-20 engineers for under $6-8M/year and use TSMC's superior fab facilities to produce my own special sauce myself. Let's not forget China and India's investment in RISC-V lurking in the background.

[1] https://www.nytimes.com/2018/12/10/technology/amazon-server-chip-intel.html
[2 https://siliconangle.com/2018/02/12/googles-internally-developed-ai-chips-now-available-public-cloud/
[3] https://www.bloomberg.com/news/articles/2018-04-18/facebook-is-forming-a-team-to-design-its-own-chips
[4] https://en.wikichip.org/wiki/tesla_(car_company)/fsd_chip

You make a good point about text correction software, though.
A version of autocorrect which did not insert apostrophes where they are not wanted would be a significant boost to my own productivity.

Stagnancy is success! Complacency is winning! The amount of Orwellian doublespeak in the age of Trump is bewildering.

"Orwellian" implies that the argument is both 1) wrong and 2) advanced for sinister purposes. Care to defend that?

The point about markups is based on some serious empirical analysis. Pretty silly to dismiss it with a hand wave as political propaganda. I'm not qualified to assess all that they have done, but it seems logical that technology companies could have high markups while also driving great increases in productivity (maybe Google has high markups on their ad services, I dunno, but they provide the majority of their services to consumers for free, which generates huge economic value that isn't so easy to measure...).

As for the author's motives, would a Trump cheerleader post "Sigh....No, tax cuts won't boost growth" on his blog? https://growthecon.com/blog/Taxes-Growth/

It’s not that the author is a Trump cheerleader, but that they’re a cheerleader for a certain strand of economic ideology that oftentimes is logically absurd, and this is one of those times.

A higher mark-up doesn’t make the product higher value to consumers. A high mark-up is very often the sign of monopoly or oligopoly, which means value is being extracted from consumers. It can also be the sign of a product deteriorating in quality.

Treating price and value as equivalent requires a hell of a leap of faith and yet it is the premise behind almost all of these “primers” on economics that Tyler peddles.

The Great Stagnation: Big Business, the Complacent Class, Stubborn Attachments, and Average Is Over

It isn't Orwellian, nor anything from the age of Trump, it is just a series of book titles strung together. Almost as if the author simply does not really care about anything in particular - for example, the subtitle of one them is 'How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better' and another subtitle is 'Powering America Beyond the Age of the Great Stagnation.' You can mix and match as you choose.

And I'm not at all joking, I'm genuinely curious: is clockwork_prior the biggest asshole on the internet? Not evil, not malevolent...just a gigantic douchebag. I honestly can't think of another worse.

You don’t use Twitter?

And now I'm even more glad about it, based on your comment.

P Burgos wins the internet.

@realDonaldTrump fits your description almost to the letter.

Didn't want to make this political. I'm serious, among non-famous people, prior is without question the biggest asshole on the internet.

He's not really cracked the subtitle lark: there are no references to cats, golf, or nazis.

Use software to get more out of what you have. Postpone real goods until absolutely needed. Less real stuff sitting around doing nothing. Just in time inventory.

Correction in text - required -

What happens when workers realize they stopped producing low margin products and produce high margin products instead and overall productivity in firm rises? Are they pushing for higher wages? Depending on where the firm is located of course because in China nothing would change for non management positions.

1) Workers' wages are based on their productivity, not their employer's productivity.

2) In China, wages have gone up dramatically over the years. China is no longer the go-to destination for cheap factory labor (and hasn't been for quite awhile).

What about the literature showing large divergence in salary and productivity between leading firms and the second and third tiers?

A minimum wage worker that sells 10 Big Macs per hour is more productive than a minimum wage worker that sells only 5 but they are both paid the same.

Depends where this over achievement in productivity comes from. If it is due to their superior skills then if the current employer doesn't recognise this, a competitor might and then hire the person away for more money, leaving the original employer only having low productivity people. If it is due though to the employer provide a better system, then probably you are right, the employee is likely not to see an increase. You might say that fast food employees don't get hired by competitors, but that is not true, high productivity people are often aware of their own value and if they are seeing they are not being paid for it, would definitely look for higher paying jobs.

Overall the idea that employees have no agency and must have their salary and benefits looked after by someone else is a really condescending way of looking at things.

"A minimum wage worker that sells 10 Big Macs per hour is more productive than a minimum wage worker that sells only 5 but they are both paid the same."

They might be paid the same for 30 days or so. At about that point their wages are likely diverge rather sharply.

A student spending 2 hours a night doing homework has the same grade as a student doing no homework, before the first test grade is recorded. For much the same reason.

"communications, technology, health care, and education"

There you go kids. These are the jobs you need to get unless you want to become an opioid addicted Trump voter when you grow up.

Those are all the big career clusters for college grads, right (excluding accounting and finance)? It isn’t exactly news that those are the careers where the jobs and money are going.

When our firm first purchased desk tops for the staff, they were bulky and loud (they had whirling fans to keep them cool) and slow and user unfriendly. And so were the desk tops. That was decades ago. Desk tops were something new, and the potential for improvements great. Indeed, so much money has been invested in Silicon Valley (much of it coming from . . . . the government), that it's a miracle California doesn't sink. It's the investment, stupid! Of course, all that money invested in Silicon Valley meant that it wasn't being invested in something else; opportunity costs are a real thing. Hence, productivity in much of the American economy has been stagnant, as have wages.

Down here in the South, we build houses, lots of them, as people migrate here from elsewhere for reasons that I don't understand (it's hot and humid, and hurricanes happen). And we build the houses today pretty much like we built them in my grandfather's era, the main difference is that today we use Mexicans. With all these newcomers down here, it would be nice if we invested in public transit, modern public transit, the kind they have in China. With all that money going to Silicon Valley, however, there's not enough left over to fund transit. So we waste years stuck in highway traffic, magnifying the inefficiency of the firms where people who do work work. I'd be willing to pay a high mark up for a modern transportation system.

But I digress. I am happy for the people in Silicon Valley. It's not as though they don't suffer hardships, with outrageous housing prices and earthquakes and all those west coast Straussians. Besides, not all sectors in tech generate the same level of profits. Software, social media, and other information-based firms seem to generate most of the profits, while producers of hardware don't. The most profitable firms, Facebook and Google, generate their profits by selling digital advertising. They are very good at it, with the algorithms they have developed to target their product (a/k/a customers). That doesn't mean the advertising sector has grown, because it hasn't, it just shifted from old media to new media. Winners and losers. That's life in the fast lane. Or down here in the South, the slow lane.

Even Singaporean bureaucrats are smart enough to know that public transit is a better long term bet than virtue-signaling your environmental cred and flaunting your social status with electric vehicles like Tesla. Is their public sector smarter than our private sector?

https://www.bloomberg.com/news/articles/2019-08-21/singapore-says-musk-s-vision-promotes-lifestyle-not-climate

Singapore is dense and small. Of course, public transit makes sense there. Most of the places Americans live are spread out and low density. Public transit there makes as much sense as going to a Boston beach in December.

Oh yes, because China is dense and small too. And Japan. And the whole of Europe.

Public transport is more efficient than private car transport by every metric (economic efficiency, time, environment, space).

Cars have their place, but commuter traffic in the US is insane for any half developed country.

China, Japan and Europe are all denser than the US. And the US has a pretty large and efficient air transport industry, which is, of course, public transport.

Trains aren't the end all of public transport.

The F-35 JSF program by Lockheed is a "high markup" product that is run like a software service. Not sure what to make of it.

"In 2018, Goldfein called the F-35 “a computer that happens to fly” ...... One solution favored by Winter during his recent tenure was so-called agile software development. His vision for “continuous capability development and delivery” resembles DevOps, a popular method in the private sector for quickly testing and evaluating features for new products."

https://www.nytimes.com/2019/08/21/magazine/f35-joint-strike-fighter-program.html

Caterpillar is an interesting benchmark. Lifetime cost of ownership is 3-10 times initial capital cost, about 40% of the currently in-use equipment set offers remote connection (probably all the recent gear), and they spend a lot of money on R&D, with an extensive patent portfolio, supporting features like remote equipment diagnostics, collision avoidance, and even autonomous opeartation. One might say it is evolving toward a computer that happens to haul material or move earth.

“a computer that happens to fly” but not terribly well.

Nor, judging by the availability figures, terribly often.

Not as often as liked, but it seems it does the job very well.
https://nationalinterest.org/blog/buzz/why-f-22-and-f-35-cant-be-defeated-theres-problem-76006

Due out in January, you can pre-order here.

I am getting increasingly annoyed by the publishing industry's habit of holding books for months and months after a book is ready.

But hey, what's four months or more? Maybe the book just isn't worth reading anyway.

I don't know if increasing markups are a sign of improvement in the service sector because, with AI and other technology, we have become very good at identifying and manipulating attributes to target individuals to their actual willingness to pay. Individual pricing extraction.

Second, another shift has been towards complexity in pricing and using consumer psychology to extract money--look at your credit card plan (initial fee, default fee, different interest if late, different discounts for gas, entertainment, etc. which lure you in), mortgage features, cable and cellphone packages.

If you want to learn more about this, particularly as it relates to AI and consumer psychology, I would recommend Harvard Econ and Law Prof. Oren Bar-Gill's book: Seduction by Contract.

You can have higher margin growth and not have that be a sign of productivity.

I would try to get, if you can, Oren Bar-Gill's article in the University Chicago Law Review, which covers the items I mentioned: https://hls.harvard.edu/faculty/directory/10042/Bar-Gill/publications

By the way, increasing margins, rather than a signal of productivity, might be a sign of increasing market power. http://www.janeeckhout.com/wp-content/uploads/RMP.pdf

>"Why a stagnant economy is a sign of success"

Because the economy was stagnant for 8 years under Obama, of course!

Ah, those were the days!!

Here are the Federal Reserve charts on unemployment rate over time:https://fred.stlouisfed.org/series/LNS14000024

I assume you are just spoofing, but in case you are serious, the charts show the decline in rates during both periods. Trump was lucky Obama preceded him because the rate of decline has been constant.

This was meant as a response to Trans above.

Fake news, Bill. Everyone knows the economy didn't grow at all (hence 'stagnant') under Obama. Only when Trump got in did the economy get moving again.

Sorry for trying to put one over on you.

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