Results for “new service sector” 331 found
Is Sweden an economically overrated country?
In addition to my earlier pick of Chile, I now must nominate Sweden and Norway for this honor. Both are wonderful countries, and in absolute terms very likely to remain strong performers. But I think a good deal of that old Nordic magic is slipping away, and this has become more evident in the last few years.
Let’s start with Sweden and maybe I’ll get to Norway another time:
1. The average product of their education system seems to have declined rather rapidly, as measured by test scores. On PISA they have gone from #4 to #21.
2. Arguably the basic Swedish economic social model is inconsistent with their level of immigration, and I don’t see them switching to a different economic and social model anytime soon. You can be pro-immigration, and still not think Sweden is honing in on the right mix of domestic policy and immigration policy.
3. Swedish manufacturing seems to be deindustrializing at a faster than expected pace. And some of Sweden’s most successful sectors are exposed to a lot of competition from emerging markets, in particular because they rely heavily on engineering talent. Sweden also has a significant presence in financial services, but they are not an obvious future winner in that area. And do timber, hydropower, and iron — their main commodity exports — have such a promising future? There are probably few disasters lurking here, but lots of question marks.
4. Sweden doesn’t seem to have a lot of low-hanging fruit left. Female participation in the labor force already is high, and they already have done lots of liberalization, privatization, and deregulation. It is not clear where the next generation of policy improvements will come from. The McKinsey report recommends “increasing government productivity” as a major source of potential gains, but that is hardly easy, even for the Swedes.
5. The Swedish central bank seems to have scored an “own goal” by engaging in premature tightening, coming out of the earlier recession. They’ll make much of that up over time, but still it is a sign the country has lost some mojo.
6. Sweden’s household to debt ratio is about 170%, one of the highest in the world. This is not only troubling in its own right, but arguably it is a sign debt is being used to make up for a slow accumulation of underlying economic deficiencies, as was the case in the United States. Furthermore “Four in 10 mortgage borrowers in Sweden are not paying off their debt, according to data collected by Reuters, and those that are repaying the principal are doing so at a rate that would on average take nearly a century.” They are probably still in the middle of a housing bubble.
7. There is an erosion of support for mainstream Swedish political parties. You don’t have to approve of those parties to see this as a symptom of a very slight underlying political rot setting in. The “extreme Right” party has seen a rapid rise in support.
8. A rampaging Putin probably won’t harm them directly, but still recent Russian events raise geopolitical risk in their neighborhood.
Don’t worry, the Swedes will do fine, but they have arrived at officially overrated status. I was more sanguine about their prospects a few years ago than I am today and I would not invest in their stock market. If you wish to count their pluses however, they still have a very good system of government, a strong ethic of trust and cooperation, a good ability to change course when necessary, high productivity, a strong presence in information technology, a wonderful export capacity, low public debt, and first-rate proficiency in English, among other virtues.
That all said, the Swedish currency is actually down against the euro since the beginning of the year.
(Understated) claims about Russia
Here is a new research paper by Voskobvoynikov and Solanko, but dating before the collapse in oil prices:
Based on newly available data, we argue that multifactor productivity increases over the period 1995-2008 generated only about a half of Russia’s GDP growth, a smaller increase than most previous estimates. Further, growth in multifactor productivity seems to have contributed to a smaller share of GDP growth in 2003-2008 than in the first seven years of our observation period. These results imply that increases in capital inputs, and consequently investments in fixed capital, are more important than previously thought for Russia’s economic growth. Detailed analysis of industry-level data reveals two drivers of economic growth in the period: the extended oil & gas sector and high-skill-intensive services. Our analysis indicates that growth in the extended oil & gas sector reflected increased capital inputs, while growth in high-skill-intensive services seems to be part of catching up with more advanced markets. Neither sector is likely to spur growth in the coming decade.
The paper itself is here, via www.bookforum.com.
Building the Voluntary City: Lessons from Gurgaon and Jamshedpur
The world’s urban population is growing very rapidly, especially in the developing world. The McKinsey Global Institute estimates that in India alone such an expansion will require the building of, in essence, a new Chicago every year for the next several decades. The problem with these numbers is not the expense. The problem is political and organizational. Many currently less-developed countries, including India, remain high in corruption and low in efficiency, especially in the administration of their towns and cities. It would be wonderful if foresighted and public-spirited government planners would provide India and other developing nations with wise urban planning but it seems unwise to rely on what has historically been rare for this massive transformation. Is there an alternative?
In Lessons from Gurgaon, India’s private city (working paper) found in a new book Cities and Private Planning Shruti Rajagopolan and I explore this question. Gurgaon, which I have written about before, shows both the successes and failures of private development. On the surface, Gurgaon is a gleaming, modern city built nearly overnight on wasteland. Gurgaon was built, however, without benefit of planning and its failures–most notably poor and inefficient provision of water, sewage, and electricity–are a warning. The failures all stem from high transaction costs, Gurgaon’s private developers have simply not managed to Coasean bargain and internalize externalities. It’s clear from Gurgaon that cities need advance planning–a reservation of rights of way for water, sewage and electricity at the very minimum–but does the planning have to be provided by government which is often incapable of such foresight?
The lessons of Jamshedpur, India, suggest another approach. Jamshedpur is a private township, planned from the beginning by visionary businessman Jamshetji Nusserwanji Tata, who, after travelling to the United States to see Pittsburgh, returned to India to found Tata Iron and Steel. Jamshedpur has been run by a single, integrated entity for over 100 years and as it is integrated it has internalized externalities. As a result, Jamshedpur, India’s other private city, has some of the best urban infrastructure in all of India.
Gurgaon shows the benefits of competition. Jamshedpur the benefits of integration. Can we get the best of both worlds?
If the rights to develop Gurgaon had originally been sold in very large packages, some five to seven proprietary but competitive cities could have been created in that region. Within this system the role of the state is to make it possible to auction large parcels of land. Once such parcels and associated rights to develop the land are created, private developers will provision public goods and services up to the edge of their property.
As proprietary communities, the competitive cities would have every incentive to invest in and especially to plan for appropriate infrastructure. Moreover, with five to seven communities in the same region, competitive pressures would keep rents low and at efficient levels for maximizing net benefits (Buchanan and Goetz 1972, Sonstelie and Portney 1978). Within the larger city, subdivisions on the order of neighbourhoods and business districts could be sublet and run by competitive firms with the overarching city establishing rules to internalize externalities. Competitive private governments would also generate experimentation and innovation in new rules that would then spread through intercity learning (Romer 2010).
Thus, Rajagopolan and I conclude:
In the next five decades many entirely new cities with populations in the millions will be built in places where today there is little or no population or infrastructure. Most of the urban development will occur in the developing world where government resources are stretched thin and planning is in short supply. Gurgaon illustrates the scope and the limits of private sector provisioning when the state machinery fails to provide essential public goods. The lesson of Gurgaon, Walt Disney World, and Jamshedpur is that a system of proprietary, competitive cities can combine the initiative and drive of private development with the planning and foresight characteristic of the best urban planning. A proprietary city will build infrastructure to attract residents and revenues. A handful of proprietary cities built within a single region will create a competitive system of proprietary cities that build, compete, innovate, and experiment.
Does sterlingisation make sense for Scotland? Or would a separate currency be better?
Angus Armstrong writes:
Sterlingisation appears to offer continuity but in fact much would change. This is the riskiest of all currency arrangements being considered. With a debt burden of more than 80 per cent and projected fiscal deficits, Scotland would have little capacity for independent macroeconomic policy. It would have no capacity to provide emergency liquidity to its financial sector and little scope for a credible deposit insurance scheme (for instance, Panama does not offer deposit insurance).
Financial services are Scotland’s largest export sector. Scotland’s non-oil trade deficit has been around 7 per cent of GDP over the past three years. Therefore, the loss of financial services exports would leave the balance of payments very exposed to declining oil and gas revenues. The fall in general prices and wages to restore competitiveness could be substantial. As we have seen, governments with high debt levels, no control over their currency and external deficits can also need emergency support.
That is from an FT symposium on Scottish currency choices, which is interesting throughout, at least for those of us obsessed with the theory of optimum currency areas.
Euro adoption does not generate much sympathy as an option. Opinions are mixed on an independent, floating currency. In the steady state it could work fine, as is the case for Sweden. I worry about the transition, however, and finding a proper conversion rate for current Scot bank deposits denominated in sterling.
If the expectation is that those deposits will be undervalued in the process of conversion, bank runs may ensue. Another option is continuing uncertainty about future monetary policy for New Scot Lanarks, combined with prices which are slow to adjust to the new medium of account. In fact pricing in terms of English pounds might remain the dominant practice for years. In that case exactly what kind of monetary policy promise is the new Scot central bank making in the first place? Everything is priced in terms of pounds, and the New Scot Lanark floats against the pound in a meaningless fashion. Who should want to hold the New Scot Lanark in the first place? Won’t any combination of announced conversion rates/monetary policy reaction functions involve some risk of a weak Scot currency and thus again ex ante bank runs?
Even Ronald MacDonald, who favors the independent currency option, wrote this in the symposium:
The currency is likely to be very volatile in any transition period and this would have implications for trade. However, the macroeconomic benefits of a separate currency clearly vastly outweigh the microeconomic costs, although the transition period is likely to be very painful.
I guess we’ll know soon enough how they vote.
Which social groups and classes should fear higher price inflation?
Paul Krugman considers who is helped and hurt by higher rates of price inflation, and he sees the big losers as the wealthy oligarchs (and see his column today here). In contrast, I see the big losers as those with protected service sectors jobs who do not wish to have their contracts reset. If you are a schoolteacher, a nominal wage cut is likely to mean a real wage cut because you don’t have the power to renegotiate into a deal as good as the one you started with. The declining labor mobility of the United States in general means that workers are more vulnerable to higher rates of price inflation. A guy living in Cleveland who plans on leaving for Houston is probably less worried about nominal variables, because he will be doing a new contract negotiation anyway.
We all know that inflation is extremely unpopular with voters. We also observe that inflation remains extremely unpopular in a variety of northern European economies, which typically have more egalitarian distributions of income (though not always wealth) than does the United States. In any case the top 0.1 percent in those countries has less wealth per capita than in the U.S. and, at least according to progressives, less political influence too.
Of course the ability of inflation to erode rents is one of its virtues. The super-wealthy are often earning rents, but typically those rents are structured to be relatively robust to changes in nominal variables. For instance the rent might take the form of IP rights, or resource ownership rights. Simple loans of money, as we find in traditional creditor-debtor relationships, just aren’t monopolizable enough or profitable enough to be a major source of riches for the most wealthy.
I was puzzled by this comment on Krugman’s:
But there is one small but influential group that is in fact hurt by financial repression
which is just like what Hitler did to the Jews: again, the 0.1 percent.
People that wealthy can put their money into hedge funds, private equity, private capital pools, and the like. Of course there is risk involved but they have a chance as good as anyone to earn the highest rates of return prevailing in an economy, through creative uses of equity and on top of that very good accountants and tax lawyers. The very wealthy also have the greatest ability to hedge against inflation using derivatives and commodities, if they do desire.
In other contexts, Krugman (correctly) stresses that price inflation lowers the real exchange rate of a country (and thus is not neutral, supporting the view that nominal variables really do matter). So one big group of gainers from domestic inflation are those who invest lots of money overseas, wait for some inflation, and eventually convert their foreign currency holdings back into dollars for a very high net rate of return.
Which group of people might that be? The super wealthy of course. (This internationalization of returns for the super wealthy, by the way, is one big difference between current times and the 1970s.)
I am not suggesting that the very wealthy are out there pushing for higher inflation. But they are much more protected against such inflation than Krugman’s analysis suggests, and the middle class in protected service sector jobs is more vulnerable than is usually recognized. There is a reason why 4-6% price inflation has become the new third rail of American politics.
Addendum: Here are some related comments from Brad DeLong. I understand the very wealthy as believing (rightly or wrongly) that higher rates of price inflation increase economic uncertainty without providing much in the way of benefit for the real economy. So, given that belief, why should they favor higher price inflation? Since the status quo is based on low rates of price inflation, a switch to higher inflation would in fact disrupt markets (for better or worse), which would send a kind of self-validating short-run signal, at least apparently affirming this view held by the super wealthy that inflation will increase economic uncertainty.
The Silicon Valley wage suppression conspiracy
Many readers have asked me what I think of the email chain which shows evidence that Silicon Valley firms conspired to hold wages down, by refusing to engage in competitive bidding for workers’ services.
I would suggest caution in interpreting this event. For one thing, we don’t know how effective this monopsonistic cartel turned out to be. We do know that wages for successful employees in this sector are high and rising. Many a collusive agreement has fallen apart once one or two firms decide to break ranks, as they usually do. Without legal enforcement, or without an NCAA-like clearinghouse enforcement structure (also backed by the law), it is hard to find examples of persistently successful monopsonistic labor-buying cartels. One reason is that workers can find means of switching firms which do not directly implicate the new hiring firm as the villain which plucked them away. The most successful collusive agreements are not usually monopsonistic and furthermore they are often based on self-sustaining and self-interested norms which do not require articulation in the form of incriminating emails.
A second point is this. Let’s say you knew that when you took a job at Apple or Google that no other Silicon Valley firm would bid you away. You don’t need to have explicit knowledge of the workings of the cartel, rather you simply observe that other people in your general position seem to stay put rather than receiving fantastic outside offers. Given that you have outside alternatives, you would demand, and receive, higher wages in the first place for moving to one of those firms. This actually would increase wage compression and limit inequality, albeit while decreasing efficiency. Still, workers as a whole would win back some of what they seemed to be losing, albeit not all of it.
Which countries will fare worst from a Chinese slowdown?
If you want to look at some good tables ranking the vulnerability of emerging countries to China, you could do worse than check Craig Botham of Schroders’ views summarised at http://blogs.ft.com/beyond-brics/2014/03/13/ranking-em-vulnerability-to-china/#axzz2vlzb3Xby. According to this, Chile, Columbia, Russia, South Africa and Peru are the most exposed, but few countries in Asia get off lightly, or Brazil for that matter. And while Australia doesn’t figure, of course, Perth should. And because of other concerns people have about the lack of demand in Australia ex-Perth, creeping weakness in employment, and looming instability in housing and mortgage markets, this is definitely a ‘watch-this-space’.
Looking at copper, half of China’s usage is accounted for by infrastructure and construction, and a further third by consumer and industrial goods. To the extent this reflects China’s development model, i.e. with an emphasis on fixed investment and exports, respectively, it is clear that economic rebalancing away from these sectors to household goods and services must entail a significant fall-out in terms of the commodity intensity of growth.
China’s consumption of other commodities also accounts for a hefty share of global production, though not as large as for base metals. In the case of non-renewable energy resources, the proportion is 20%, and for major agricultural crops, it’s 23%.
That is from George Magnus.
Should we worry that Netflix is buying transit rights from Comcast?
I say no (for background read here, and Dan Rayburn has very useful coverage, dispelling a variety of myths). To be sure, one may believe there are monopoly problems at the retail level in the cable sector. We could alleviate those with local loop unbundling and/or deregulation, as I discussed yesterday. But within that setting, Netflix paying Comcast won’t make that monopoly worse.
In support of this conclusion, I would cite two literatures. The first is Ronald Coase’s analysis of payola. If a gatekeeper can extract payments from input suppliers, the end result of that process need not be bad for consumer welfare and very often is positively good for consumers. In a nutshell, the gatekeeper won’t want to exclude the programs which consumers really want. Those programs contribute to the profits of the gatekeeper.
The second literature is that on double marginalization. This literature considers settings where you have a retailer with market power and an input supplier with market power, and the input supplier needs the retailer for access to consumers. In those cases either integration or Coasean bargaining is usually in the interests of consumers, as it minimizes the double mark-up and thus lowers the costs of the market power. To put this more concretely, the two parties will deal so that the marginal cost of the input to the monopolist is lowered, the monopolist expands output (and profit), and those gains are shared between the two institutions with market power.
When you put those two theories together, Netflix buying transit rights from Comcast is likely fine. Don’t translate your opposition to cable monopoly into opposition to this agreement. Seton Motley asks a good question:
Should we worry Amazon (Prime) buys transit rights from UPS & USPS?
So, if someone criticizes this new deal, but cannot put the argument in Coasean language, they probably have not thought it through carefully enough.
Moving beyond that, can we think of reasons why the basic Coasean results may not hold?
1. Expected joint profit doesn’t map perfectly well into consumer surplus.
2. The status quo ex ante was based on some amount of queuing of Netflix access, rather than a dollar-based marginal cost for selling the input, as in basic Coasean models.
3. None of these transactions are purely Coasean when regulatory threats beckon and thus a wider range of outcomes is possible.
4. Comcast has read Doug Bernheim and can now construct a scheme to preempt Netflix from this market altogether,
I’ve pondered those long and hard, but the standard Coasean results still seem reasonably likely. And if they are not, it would be for reasons so convoluted it is unlikely to represent anyone’s actual worry. From that list only #4 seems to have any bite, but I don’t see that #4 applies empirically. Netflix has risen greatly in value over the last year, this new development is hardly a surprise, and the fees to Comcast, while secret, have been described as “de minimis.” There is quite a good chance that Netflix benefits from this deal and this is more of a “we are here for good” statement than Netflix falling off a cliff.
You also could try this argument:
5. By agreeing to pay a price for transit rights, Netflix imposes a negative pecuniary externality on smaller streaming services and content providers, which in the longer run will mean a negative non-pecuniary externality for variety-seeking consumers.
Maybe, maybe so. I do take that argument seriously. But it’s also unconfirmed, Coase on payola implies it won’t be so bad, and furthermore the Netflix transaction, in stand-alone terms, still would seem to be welfare-improving. Besides, what happens if Netflix expands by 5x or 10x, should the company never have to pay anything? Is it so terrible if tomorrow’s necessary equilibrium shows up today?
Addendum: Timothy Lee offers a different perspective. Perhaps I am failing to understand his argument, but I don’t see why having a cluster of mid-level intermediaries should make the market as a whole more competitive.
Or you may be tempted to write a screed about the dangers of moving away from net neutrality, and associate this development with that movement. I say you would do better to stick to the specific economics of this particular issue and explain, in terms related to the Coasean model, exactly what will go wrong.
Further addendum: Joshua Gans offers comment.
High prices for broadband, contestability, and Google Fiber
Here is a potential new development:
Verizon is adding more antennas to its network, forming smaller wireless cells with stronger coverage and rolling out service on new segments of the wireless spectrum, the digital equivalent of opening new lanes for traffic. Sprint is introducing a service called Sprint Spark that increases access speeds if customers have devices that can use multiple wireless frequencies at once.
If pCell works as promised, Mr. Perlman’s technology could result in much bigger gains in wireless speeds. In traditional cellular networks, antennas placed around a city transmit wireless signals to all of the mobile devices within their area. As more people enter an area, they share the wireless network with everyone else there, resulting in slower speeds. Wireless carriers cannot simply solve the problem by putting antennas everywhere because their signals can be disrupted if they are too close together.
With a network of pCell antennas, someone with a mobile device will get access to the full wireless data speed in the area, regardless of how many other people are sharing that network, Mr. Perlman said.
There is also this:
The plan is to bring Google Fiber to 34 cities and see how that goes.
Here are various satellite video streaming services.
I do not feel I can judge the prospects for these developments. The point, however, is this. Improving connectivity is an extremely dynamic market sector. A high mark-up on cable internet connectivity, as might be applied by say a Comcast monopolist, is also creating a “prize” for further innovation in the sector. Admittedly one does not prefer to have this prize funded by deadweight loss (less broadband consumption) but virtually all prizes are funded by deadweight loss in some manner rather than by lump sum taxation.
When people claim “the current mark-up is too high,” that is an entirely reasonable stance. But when you rewrite it as “the current innovation prize, funded out of deadweight loss” is too high, that reframing brings some clarity, some moderation, and I think also induces some more agnosticism about the costs of the current semi-monopoly. For similar reasons I don’t worry about monopoly in the eBook market and the like and there the case for simply ignoring the problem is much stronger because the options and cheapness have exploded so radically and so quickly.
So I don’t see the current cable semi-monopoly as lasting that long. And its current cost cannot be that much higher than the cost of sending a disc in the mail, otherwise the disc would be sent. Alternatively, most communities have public libraries which offer pretty good and pretty free internet connections, including video streaming of course. If the argument is simply “this prize, for future connectivity innovation, cannot be funded from deadweight loss because it means that in the meantime some poorer people will have to wait to get their discs in the mail and make too many trips to the public library”…well, I guess I’m not that impressed this is a major public policy problem.
The longer and more you regulate cable prices, the longer it will take this sector to reach a more competitive equilibrium.
By the way, dear reader, I am not clever enough to use Netflix streaming, as I find the TV menu confusing. So I still get the discs in the mail.
Is Robert Gordon underestimating the progress of automation?
In his recent NBER working paper, Robert Gordon wrote:
This lack of multitasking ability is dismissed by the robot enthusiasts – just wait, it is coming. Soon our robots will not only be able to win at Jeopardy but also will be able to check in your bags at the sky cap station at the airport, thus displacing the skycaps. But the physical tasks that humans can do are unlikely to be replaced in the next several decades by robots. Surely multiple-function robots will be developed, but it will be a long and gradual process before robots outside of the manufacturing and wholesaling sectors become a significant factor in replacing human jobs in the service or construction sectors.
So how is it with those skycaps? I queried Air Genius Gary Leff and he wrote this back to me:
There are still people picking up/loading bags onto the planes, but —
American Airlines has tested self-tagging of bags in Boston, Austin, and Orlando
http://boardingarea.com/aadvantagegeek/2012/11/14/american-airlines-orlando-mco-self-tagging-tag-bag-luggage-system-check-i/Qantas has permanent bag tags that work with RFID readers at the airport, you check in online and drop your bag at the bag drop and leave. This works for their Australian domestic flights. (I do have a “Q Bag Tag”)
http://www.qantas.com.au/travel/airlines/q-bag-tag/global/enBritish Airways is trialing an end to paper tags, they began with Microsoft employees in Seattle this past fall
http://boardingarea.com/viewfromthewing/2013/11/07/british-airways-new-electronic-baggage-tags/Brussels Airlines on intra-European flights departing Brussels
http://brusselsairlines.prezly.com/brussels-airport-and-brussels-airlines-test-automated-self-baggage-drop-off-BWI is working on their baggage systems to accommodate self-checking of bags
http://www.capitalgazette.com/news/general_assembly/bwi-moving-forward-with-new-hotel-self-bag-check-in/
And that required no more than a few minutes thought from Gary.
The cable television market is growing more contestable
The Satellite TV Providers industry is in the midst of a revolution, supplying popular family shows, news, movies, sports, documentaries and other products to a growing swarm of eager subscribers willing to pay for in-home entertainment. For example, the introduction of high-definition (HD) TV vastly improved the quality of shows and attracted subscribers even as disposable income dropped during the Great Recession. “In addition to a dramatically improved reputation for quality, new networks, channel offerings and bonus features are strengthening the industry’s appeal to consumers,” says IBISWorld industry analyst Doug Kelly. Higher spending on industry services is anticipated to result in 5.6% annualized revenue growth to $41.4 billion in the five years to 2012. This climb includes an expected 3.8% increase in 2012 as more consumers continue subscribing to satellite TV…
Over the next five years, the industry will face escalating competition from other media.
Have I mentioned Hulu TV and YouTube and Netflix, especially the non-broadband requiring discs? How about reading the internet? How about using your iPad to watch downloaded movies and TV shows? New social media for sharing? “Let them download somewhere else”? There is a reason why “cable” and “cord cutting” appear so frequently in the same sentence.
There is no big deal with Comcast acquiring Time Warner, also because the two companies serve separate districts. If anything the new consolidated entity will have stronger monopsony power over programs and can bid their prices down. (Isn’t ESPN with its sports contracts a monopoly of sorts, just as the sports leagues are?) We all know that monopolists facing lower marginal costs tend to lower price (contrary to Tim Wu), even if not by as much as we might like. Krugman worries that “This would, in turn, make it even harder for potential competitors to enter markets served by ComcastTimeWarner, strengthening its monopoly position.” A better sentence would have been “No five year period has so increased the contestability of the cable sector than the last five years in the United States.”
One might also add that if ComcastTimeWarner can bid down prices on programs, this need not keep out other competitors. Those programs are non-rivalrous in consumption, and the sellers can extend whatever price discounts they might wish to new competitors, to increase the demand for their products. The final equilibria here are complex, but in general the ability of a strong firm, in this setting, to bid down input prices is not a bad thing.
Addendum: If you wish to worry about something, it is how to get more competition within a single market, as you might for instance do through municipal wi-fi, the successor to 4G, and so on. Worrying about the horizontal spread of trading in one monopoly for another is beside the point. What I am seeing in various comments on Twitter is people with objections to cable monopolies, some of them valid objections, then objecting to possible changes in the market out of basic mood.
Joseph Nocera calls me on the phone
On Friday, I called Tyler Cowen, the George Mason University economist (and a contributor to The New York Times) to ask what he thought about the relationship between technological innovation and jobs. He told me that he mostly agreed with Brynjolfsson and McAfee about the future, though he disagreed with their assessment of the past. (One of his recent books is titled “The Great Stagnation.”)
Yes, he said, technology would replace humans for certain kinds of jobs, but he could also envision growth in the service sector. “The jobs will be better than they sound,” he said. “A lot of them will require skill and training, and will also pay well. I think we’ll get to driverless cars and much better versions of Siri fairly soon,” he added. “That will make the rate of labor force participation go down.”
Then he chuckled. He had recently been in a meeting with someone, explaining his views. “So what you’re saying,” the man concluded, “is that the pessimists are right. But it’s going to be much better than they think.”
What is wrong with the Russian economy?
The Economist had a very good feature-long piece on that question this week, here is one good excerpt:
In today’s Russia, oil and gas account for 75% of all exports, compared with 67% in 1980. Although Russia no longer buys grain from America, as it did in the 1980s, 45% of what Russians buy today is imported. Walk around a department store in central Moscow, and it is hard to find anything that is produced locally. The state remains the single largest employer, while its corporations—controlling natural resources, infrastructure, banking and media—dominate the economy.
As Clifford Gaddy and Barry Ickes, two American economists, have argued, the highly inefficient industrial structure of the old Soviet economy, based on misallocation of both resources and people, remains intact. The oil rent reinforced and perpetuated it: it has bought political stability and the loyalty of the population, but has slowed down modernisation. Inevitably, the result is stagnation.
…The state is one of the chief obstacles to Russia’s modernisation. During the 2000s the number of bureaucrats almost doubled. A quarter of the workforce is employed in the public sector. The total number of people who depend on the state is between 35% and 40%, says Boris Grozovsky, a Russian economic observer. This, he says, points to the share of the electorate that benefits from the status quo. At election time municipal workers are bused in to show support for Mr Putin. Meanwhile, the main purpose of Russia’s civil service is to shuffle papers around and extract administrative revenue from firms and private citizens. The bureaucrats have little interest in fostering competition that might cost them their jobs.
The piece is interesting (and depressing) throughout.
The North Carolina unemployment insurance experiment may be looking up
The benefits have been stopped, and there has been much recent debate over how well this is working to stimulate reemployment. This new study is from Kurt Mitman, who is a doctoral candidate at U. Penn and an NBER research associate, here is his summary:
1. Evidence from the establishment survey confirms a substantial increase in employment in North Carolina following the unemployment insurance reform.
2. The increase in payroll employment reported by the sample of North Carolina employers is smaller than the increase in employment reported by workers in the household survey.
3. The increase in employment [is] driven by the private service sector.
4. A comparison of the growth in employment between North Carolina and the adjacent states in Figure 5 reveals a similar growth in the post-reform period between the two Carolinas, which is much faster growth than in Virginia.
5. Results in Table 3 reveal a mild tendency toward higher weekly hours post reform and little change in wages and earnings.
The full piece is here (pdf). This seems to me our best understanding of the admittedly limited data to date.
From the comments, on seasonal business cycles
ohwilleke reports:
While “Christmas” is new, the notion of a consumption splurge after the fall harvest, followed by a lean late winter-early spring season (Lent/Ramadan) before the spring harvest is deeply rooted in pre-modern agricultural reality. When you have an abundance of perishable goods it makes sense to consume them before they go bad, and then to string out the more limited supply of durable foodstuffs when fresh foodstuffs are scarce. In the same way, summer vacation is rooted in the need to free up children for agricultural labor at times of peak demand. As noted above, spring weddings supply a consumption boost after the Spring Harvest and also are timed to minimize the likelihood of critical parts of a first pregnancy taking place during the lean late winter-early spring (although these days it has more to do with the end of the school year).
Only with cheap and fast trans-hemispheric shipping (together with a lack of significant piracy for most of that trade), and advances in food preservation and refrigeration in the last half century or so, have those agricultural considerations become irrelevant (although, of course, excess and lean times should fall at different parts of the year in the Southern hemisphere and in places like Southern India, the Sahel, and the tropics of Asia, African and South America that have different seasons).
Japan and China use end of year bonuses (often as 6-12% of annual compensation) as a significant part of annual compensation as a way to share rather than leveraging macroeconomic risk for firms and the economy as a whole. In good years, when there is more supply, lots of people get big bonuses; in bad years, scarcity is widespread. The main virtue of this approach is that it makes firms more robust and puts them under less pressure to engage in cyclic layoffs but making labor costs look more like equity and less like debt. This too was well suited to an agricultural tradition rooted in sharecropping or the equivalent that was once widespread in all feudal economies as well as in neo-feudal economies in places like the American South. This isn’t a strategy limited to the orient. It is also the quintessential Wall Street economy model utilized by major financial firms like investment banks and the large law firms that serve them.
The pressure from the “real economy” – both the goods and services supply side and the labor demand side – to have punctuated consumption is much weaker now than it once was, particularly in economies or sectors of economies without the strong annual bonus tradition. The largest sectors of the modern economy that are both strongly cyclic in terms of business cycles and very seasonal within each year, are construction and real estate – and these cycles also drive a fair amount of durable goods consumption. Both construction and real estate are weakest in the winter. Agriculture’s share of the economy is now much more stable from a consumer’s perspective and much smaller as a percentage of the total economy. Real estate handles cyclic shifts by being largely commission based. Construction relies on highly fragmented project specific team building through networks of general contractors and subcontractors rather than integrated firms (a pattern also common in the film industry and theater industry).
Bottom line: The finance oriented macroeconomic models obsessed with interest rates, inflation, GDP growth rates, unemployment rates and size of the public finance sector are ill suited to analyzing optimal seasonal business cycle patterns. A more fruitful analysis looks at the roots of current seasonal patterns in economic history and at the way that the “real economy” has changed with technology to see if those patterns still make sense, perhaps for new reasons.
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