Books to crave: *A Great Leap Forward: 1930s Depression and U.S. Economic Growth*
From the ever-interesting Alexander Field:
This thoughtful re-examination of the history of U.S. economic growth is built around a novel claim, that potential output grew dramatically across the Depression years (1929-1941) and that this advance provided the foundation for the economic and military success of the United States during the Second World War as well as for the golden age (1948-1973) that followed. Alexander J. Field takes a fresh look at growth data and concludes that, behind a backdrop of double-digit unemployment, the 1930s actually experienced very high rates of technological and organizational innovation, fueled by the maturing of a privately funded research and development system and the government-funded build-out of the country's surface road infrastructure. This substantive new volume in the Yale Series in Economic and Financial History invites renewed discussions on productivity growth over the last century and a half and on our current prospects.
China robot hotpot fact of the day what happened to the Ricardo effect?
Service with a smile also comes with an electronic voice at the Dalu Robot restaurant, where the hotpot meals are not as famous yet as the staff who never lose their patience and never take tips.
The restaurant, which opened this month in Jinan in northern Shandong province, is touted as China's first robot hotpot eatery where robots resembling Star Wars droids circle the room carrying trays of food in a conveyor belt-like system.
More than a dozen robots operate in the restaurant as entertainers, servers, greeters and receptionists. Each robot has a motion sensor that tells it to stop when someone is in its path so customers can reach for dishes they want.
The full story is here and for the pointer I thank Daniel Lippman.
Why do so many prices end in .99?
Via Tim Harford, there is a new paper on this topic, by Franz Hackl, Michael E. Kummer, and Rudolf Winter-Ebmer:
Basu (2006) argues that the prevalence of 99 cent prices in shops can be explained with rational consumers who disregard the rightmost digits of the price. This bounded rational behaviour leads to a Bertrand equilibrium with positive markups. We use data from an Austrian price comparison site and results highly compatible with Basu's theory. We can show that price points – in particular prices ending in 9 – are prevalent and have signi cant impact on consumer demand. Moreover, these price points are sticky; neither the price-setter itself wants to change them neither the rivals do underbid these prices, if they represent the cheapest price on the market.
Tim's piece on the same question can be found here.
Wishing Happy Holidays to All Our Readers
Merry Christmas!
Nudge, in action
Sometimes, governments do not have to be nudged to institute a nudge:
Buy a scratch lottery ticket in Georgia, and you can win music downloads or a seat at an Atlanta Falcons game. In New York, one of the top sellers is an all-black ticket as sleek as an Armani suit. And in Texas, where they brag that everything is bigger, a single ticket goes for $50.
With state budgets in crisis and lottery-financed programs like prekindergarten being considered for cuts, the pressure is on to make lottery tickets more attractive to casual scratchers and people who may have never dropped a dollar on a chance before.
Even at Christmas, which is the busiest season for scratch tickets, no gimmick – peppermint-scented tickets, anyone? – is too ridiculous.
In Louisiana, frequent gamblers are invited to join Club Lotteaux to receive e-mail updates and other promotions, like a chance to name a reindeer and win a package of holiday tickets and a coffee mug.
In Washington State, holiday tickets come with a chance to win a home-theater system. Georgia lottery officials, who sell a $2 ticket with the unlikely combination of a snowman and Betty Boop in a skimpy Santa outfit, are sponsoring “American Idol”-style singing contests.
Assorted links
Paul Krugman’s predictions from 1998
David Henderson directs us to these. David is skeptical, and so is this source (and Megan), but I think Krugman was more right than wrong, at least if you allow him some slight rewordings. Here were his picks, noting that he offers more discussion and context at the first link:
* Productivity will drop sharply this year. Nineteen ninety-seven, which was a very good year for worker productivity, has led many pundits to conclude that the great technology-led boom has begun. They are wrong. Last year will prove to have been a blip, just like 1992.
* Inflation will be back. Wages are rising at almost 5 percent annually, and the underlying growth of productivity is probably only 1.5 percent or less. Sooner or later, companies will have to start raising prices. In 1999 inflation will probably be more than 3 percent; with only moderate bad luck–say, a drop in the dollar–it could easily top 4 percent. Sell bonds!
* Within two or three years, the current mood of American triumphalism–our belief that we have pulled economically and technologically ahead of the rest of the world–will evaporate. All it will take is a few technological setbacks or a mild recession here while Europe or Japan recovers a bit.
* The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
* As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.
* Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter.
I'll number them 1-6. On #1, Krugman should not have committed to the time frame of one year, but overall, in my view, productivity hasn't done well since he wrote. A lot of the measured per worker gains come from firing unproductive people, or overvaluing the contributions of the finance, health care, government consumption, and education sectors, not from much expanding the actual production possibilities frontier. I'll be writing more on this, and while it involves some complex issues, overall I side with Krugman.
On #2, Krugman was wrong about inflation returning, in part because he was overly optimistic about wage growth. #3 is debatable, and while one of the modal claims is wrong about Europe and Japan, he was not obviously wrong about the United States.
On #4, we may soon be reaching "peak internet." Parts of #4 and #5 may sound ridiculous, and Krugman did underestimate how much people have to say to each other, and the future of the information economy. Nonetheless, keep in mind the information technology sector has not contributed net job growth over the last decade. Smart, curious people consistently overestimate the economic impact of information technology, in part because it improves their own lives so much. #6 turned out to be true.
That's a mixed record, as anyone would have, but more insightful I think than the critics are granting.
Many of Krugman's current false (modal) predictions stem from his claims that if left-wing politicians would "get tough" and take their case directly to the public, good progressive results will follow. I view that claim as a move into a non-scientific mode of thought. While it is sometimes true, usually it is not, and there is plenty of political science literature on how hard it is to form a winning political strategy through rhetoric.
Without such a view, however, Krugman would have to entertain the possibility that moderate outcomes, or sometimes observed outcomes, are more likely second-, third-, or fourth-best efficient than he would like to admit. If you took away this one rather weak prop of his worldview, he could quite readily turn into a conservative, of course in the literal rather than the right-wing partisan sense.
A note on the Simon-Ehrlich Bet
Yesterday Tyler asked whether "Simon's prediction" of falling resources prices would continue to hold now that an era of catch-up growth is upon us. It's a legitimate question but misleading about what Simon was predicting. Simon's fundamental prediction was about human welfare not prices. Remember that at the time of the famous bet, Paul Ehrlich was predicting increasing resource scarcity, mass starvation, and an end to economic growth. Simon was arguing that human welfare would continue to rise. Resource prices were easy to observe so the famous bet was made in terms of prices. Simon understood, however, that prices are not a measure of welfare or even of scarcity (quantities would have been a better metric but these are much more difficult to observe).
As Tyler notes, catch-up growth may mean that demand will increase faster than supply at least for some periods thereby driving up prices. But here is the key point, increased demand with a non-decreasing supply means an increase in social welfare. If tomorrow we discover that cold fusion actually does work, the price of palladium will increase dramatically, perhaps never to fall again. Nevertheless, human welfare would dramatically rise not fall.
I don't have strong views on resource prices over the next century (especially when these are framed in terms of specific resources like "oil" rather than with the more fundamental concept of energy) but I would be happy to bet that human welfare will increase dramatically over the next century.
China sentence of the day
When my turn to talk about American politics came, and I tried to explain the Tea Party movement’s goal of “getting government off our backs,” I was met with blank stares and ironic smiles.
The full article is here, possibly gated (TNR), by Mark Lilla. It concerns the high and rising popularity of Leo Strauss and Carl Schmitt in China. Another excerpt:
Schmitt was by far the most intellectually challenging anti-liberal statist of the twentieth century. His deepest objections to liberalism were anthropological. Classical liberalism assumes the autonomy of self-sufficient individuals and treats conflict as a function of faulty social and institutional arrangements; rearrange those arrangements, and peace, prosperity, learning, and refinement will follow. Schmitt assumed the priority of conflict: Man is a political creature, in the sense that his most defining characteristic is the ability to distinguish friend and adversary. Classical liberalism sees society as having multiple, semi-autonomous spheres; Schmitt asserted the priority of the social whole (his ideal was the medieval Catholic Church) and considered the autonomy of the economy, say, or culture or religion, as a dangerous fiction…Schmitt saw sovereignty as the result of an arbitrary self-founding act by a leader, a party, a class, or a nation that simply declares “thus it shall be.” Classical liberalism had little to say about war and international affairs, leaving the impression that, if only human rights were respected and markets kept free, a morally universal and pacified world order would result. For Schmitt, this was liberalism’s greatest and most revealing intellectual abdication: If you have nothing to say about war, you have nothing to say about politics. There is, he wrote, “absolutely no liberal politics, only a liberal critique of politics.”
Seth Roberts offers a Chinese economics joke.
How robust are Julian Simon’s predictions?
Not the ones about population, the ones about falling real resource prices.
Here is a simple model: it is easier to transfer technologies of resource extraction than it is to transfer most other technologies. In other words, Nigeria has low TFP but still their oil rigs work pretty well.
If that's true, when the wealthiest economies are opening up a commanding lead in terms of living standards, real resource prices should be falling. Nigeria can supply a lot of oil without demanding very much.
When most of the growth is catch-up growth, the poor countries demand more resources but supply technologies are not racing so quickly ahead. Real resource prices are more likely to rise.
There is a long history of falling real resource prices, but is this simply reflecting the fact that the last three hundred years don't offer many periods of catch-up growth? Now, an era catch-up growth seems to be upon us. So why should we be so confident that Simon's predictions will continue to hold?
Assorted links
1. "Cheap talk with multiple audiences": assorted theories of Mitch McConnell.
2. What does high status email look like?
3. What happened to the future?
4. Trading on a quick computer read of digitized information.
5. What are the chances of muni doomsday?
6. Preemptive markets in everything: BOA edition.
7. Follow Basel III, the euro, Switzerland, etc. on Twitter.
We need more supply-side health policy
…in a fierce turf battle rooted in the growing pressures on the medical profession and academia, New York State’s 16 medical schools are attacking their foreign competitors. They have begun an aggressive campaign to persuade the State Board of Regents to make it harder, if not impossible, for foreign schools to use New York hospitals as extensions of their own campuses.
The changes, if approved, could put at least some of the Caribbean schools in jeopardy, their deans said, because their small islands lack the hospitals to provide the hands-on training that a doctor needs to be licensed in the United States.
The story is here.
*Kosher Nation*
The author is Sue Fishkoff and the subtitle is Why More and More of America's Food Answers to a Higher Authority. This late arrival is one of my favorite non-fiction books of the year, superb both on its topic and on the history and economics of certification more generally. Here is one excerpt:
"If they want to sell their product in the United States and they are not kosher, no one will buy it," points out Menachem Lubinsky. "Coca-Cola won't buy it, Kellogg's won't buy it. They'll be cut out of the market. If you're in China or Thailand and you want to export, you have absolutely no choice but to seek out kosher certification." Some companies get certification to fill one order from a U.S.-based manufacturer and then drop it when the order is complete, only to reapply when the next order comes in.
Definitely recommended.
Civil Society and the Iceberg Economy
I enjoyed this piece by Rebecca Solnit on what she calls the iceberg economy and the power of voluntarism:
Who wouldn’t agree that our society is capitalistic, based on competition and selfishness? As it happens, however, huge areas of our lives are also based on gift economies, barter, mutual aid, and giving without hope of return (principles that have little or nothing to do with competition, selfishness, or scarcity economics). Think of the relations between friends, between family members, the activities of volunteers or those who have chosen their vocation on principle rather than for profit.
…The shadow system provides soup kitchens, food pantries, and giveaways, takes in the unemployed, evicted, and foreclosed upon, defends the indigent, tutors the poorly schooled, comforts the neglected, provides loans, gifts, donations, and a thousand other forms of practical solidarity, as well as emotional support.
With much of this I wholeheartedly agree. But Solnit's piece is marred by an analytical framework that places cooperative charitable activities poles apart and in opposition to unprincipled, selfish capitalism. Charity and trade, however, are both species of voluntarism more closely aligned with one another than with the coercive apparatus of the state. Indeed, it is through markets that human beings achieve the most extensive cooperation. True, capitalist cooperation is not as deep as that of say the family but precisely because it is not as deep it is far wider in scope, encompassing the world. To propose the deep ties of the family as an alternative to capitalist cooperation is to understand neither and when implemented to be inimical to both.
In the introduction to The Voluntary City (note the title) Peter Gordon, David Beito and myself argued for a more inclusive framework.
The authors of this volume manifestly include non-profits in the market sector. The inclusion is important because by focusing on for-profit firms proponents of markets may have overstated the case for markets narrowly conceived. Yet by ignoring the role of non-profits, opponents of markets may have understated the case for markets broadly conceived. Alternatively put, what conventional economics refers to as market failure may actually be a limited set of problems associated with for-profit firms and markets. If the term "market" is broadened to include non-profit firms and other voluntary but not for-profit organizations, the scope of such failure may be diminished. Thus, rather than saying that the authors of this volume argue for a larger role for markets, it is more revealing to say that they argue for a larger role for civil society.
One virtue of the term civil society is that it is not wrapped up in the same baggage as the term markets; in particular, to favor civil society is not necessarily to regard self-interest as the sole or even most important motivator of human action. Unfortunately, the market/government debate has often proceeded as if it were a debate between self-interest and other-regardingness. Yet there is growing support for the view that our ancestors learned to forge connections and developed a social nature for the practical reason that such connections enhanced survival, just as did their capacity for self-interest (Ridley 1996; Wright 2000). Humans are neither purely self-interested nor purely other-regarding; humans are individuals who join groups and they possess all the skills appropriate to such a classification. It should come as no surprise then that other-regardingness is not absent from markets and self-interest is not absent from government.
Hat tip to my friends at The Browser.
Addendum: Andrew Gelman comments.