Noahpinion on China and robots

Noahpinion gets what I’ve been trying to say, and says it better than I do in his post, “Are we replacing robots with Chinese people?” Here’s a meaty extract :

I’ve been critical in the past of Mike Mandel’s thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT…productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer – and I feel like this is what Cowen and Mandel may have been getting at – is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics B.A. like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a “public good”), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big deal. If we’re not channeling enough of our economic output into the production of new technology, we’ll all be poorer down the line.

And here’s the interesting part. Romer’s first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

“I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.”

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don’t bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

Yes. That’s it exactly.

Noahpinion also asks the very good question about what to do next.

 

Productivity “Surge” of 2007-09 melts away in new data

Until this morning, the official data showed that the U.S. productivity growth accelerated during the financial crisis. Nonfarm business productivity growth supposedly went from a 1.2% annual rate in 2005-2007, to a 2.3% annual rate in 2007-2009.  Many commentators suggested that this productivity gain, in the face of great disruptions, showed the flexibility of the U.S. economy.

Uh, oh. The latest revision of the national income accounts, released this morning, makes the whole productivity acceleration vanish. Nonfarm business productivity growth in the 2007-09 period has now been cut almost in half, down to only  1.4% per year.

This revision has political and policy consequences. Back in March, I analyzed the apparent productivity surge and  argued that it was statistically suspect.  I pointed out that:

First, the measured rapid productivity growth allowed the Obama Administration to treat the jobs crisis as purely one of a demand shortfall rather than worrying about structural problems in the economy.  Moreover, the relatively small size of the reported real GDP drop probably convinced the Obama economists that their stimulus package had been effective, and that it was only a matter of time before the economy recovered.

A more accurate reading on the economy would have–perhaps–cause the Obama Administration to spend more time and political capital on the jobs crisis, rather than on health care. In some sense, the results of the election of 2010 may reflect this mismatch between the optimistic Obama rhetoric and the facts on the ground.

Now the productivity surge of 2007-09 has vanished, and so is the pretense that the U.S. economy was able to sail   through the financial crisis with barely any problems.  It’s time to set a new economic course.

Reihan Salam on German Productivity

Germany has been held up as a model for the United States by David Leonhardt and others. Reihan Salam  correctly observes that German offshoring to Eastern Europe has been an essential part of Germany’s apparent success. He also  points out that:

The fall of communism was, as Marin suggests, a positive exogenous shock that proved a tremendous boon the German economy. A 20% increase in productivity is nothing to sneeze at, and I don’t think that David Leonhardt gave the role of offshoring its due in explaining the virtues of the German model.

Of course, the Houseman-Mandel thesis also tell us that German productivity gains, like U.S. productivity gains, might offer less than meets the eye.

Reihan raises a very interesting point which I hadn’t considered. Remember that our recent paper, “Not all productivity gains are the same. Here’s why”, we divided measured productivity growth into three types:

  • Improvements in domestic production processes
  • Gains in global supply chain efficiency
  • Productivity gains at foreign suppliers.

As we noted in the paper, these different types of productivity growth cannot be told apart in the conventional economic statistics. However, the type of productivity growth matters for domestic wages and jobs. For example,  productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.

We made our argument in terms of the U.S., but it potentially applies to other countries as well. I hadn’t considered Germany until Reihan raised the point, but in fact Germany appears to use a similar import price methodology as the U.S. (see for example Silver 2007) with the potential for similar problems, though I need to take a closer look to make sure.

Here’s something to think about: In a global economy, measured productivity growth in an industrialized country potentially may not measure only the strength of that country’s domestic economy, but also its ability to successfully offshore production to cheaper countries, with implications for domestic wages and jobs.

Investment Heroes: Top Companies for Domestic Capital Spending.

As we know, the U.S. is still stuck in a capital spending drought. According to my calculations, nonresidential business investment in the first quarter of 2011 was still 23% below its long-term trend.   By contrast, nonfarm employment is about 8% below its long-term trend.

But there are some companies that are still investing in the U.S.  As part of a new paper for the Progressive Policy Institute,  I identified America’s “investment heroes”: The companies which are the leaders in domestic capital spending. Here’s the table from the paper:

In 2010 AT&T was the domestic capital spending leader, by a wide margin.  Verizon was next, followed by Wal-Mart. These are companies that invested  huge sums into the domestic economy, at a time when many other companies were still holding back.  Out of the top seven “investment heroes,” 3 were telecom companies, 3 were energy companies, and 1 was a retailer.  [Before you ask, I'm not ready to release the rest of the list yet. Some companies break out their U.S. vs non U.S. capital spending, but many don't,  so it takes time to estimate and verify the breakdown based on other financial data  ].

Why is this important? We at PPI see long-term economic prosperity as resting on a three-legged stool: Investment in physical capital, human capital, and knowledge capital.  Higher levels of  investment improve the productivity of U.S. workers, which in turn should show up as higher real wages and greater international competitiveness.  Or to put it another way: Without strong  capital spending at home, the U.S. economy will sink into irrelevance. * 

 The overarching aim of economic policy should be to encourage all three types of investment, since all are essential for long-term prosperity.  In particular, those companies which continue to invest in the U.S. need to be acknowledged for their contributions to the domestic economy, especially when other companies of equal size  are investing much less at home.  I wouldn’t go as far as to give them a medal, but let’s give them their due.  Rather than resorting to financial trickery, these investment heroes are making money the old-fashioned way–by spending on productive long-lived assets which will generate economic benefits for years to come.

*Some might argue that the U.S. has been able to generate good productivity gains since 2007 without capital spending.  But as regular readers of this blog know,  I am skeptical of the stunning productivity gains that the official statistics seem to report for many industries in 2007-09, the middle of the financial crisis (see this post here, for example).

How much of the productivity surge of 2007-2009 was real?

[This post just grew and grew and grew, until it turned into something  ridiculously long. Sorry about that–I’m probably guilty of blog abuse.   If you want, here’s a PDF version. I look forward to comments ]

Summary

In the 2007-2009 period, the U.S. economy experienced its worst recession since the Great Depression. Nevertheless, despite this deep downturn,  the near-collapse of the financial system and unprecedented global economic turmoil,  U.S. productivity growth actually seemed to accelerate in the 2007-2009 period, or at least maintain its previous pace.

The 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation.  Second, it convinced the economists of the Obama Administration that the economy was basically sound, and that the big problem was a demand shortfall. That’s why they expected things to get back to normal after the fiscal stimulus.

However, I’m going to show in this post that the  productivity gain of 2007-2009 is highly suspect.  Using BEA statistics,  I identify the industries that contributed the most to the apparent productivity gain, including primary metals, mining, agriculture, and computers and electronic products. Then I analyze  these high-productivity growth industries in detail using physical measures such as barrels of oil and tons of steel. I conclude  these ‘high-productivity’ industries did not deliver the gains that the official numbers show.

Based on my analysis, I estimate that the actual productivity gains in 2007-2009 may have been very close to zero.  In addition, the drop in real GDP in this period was probably significantly larger than the numbers showed.  I then explore some implications for economic policy.

Overview

I start by giving several  data points.

*From 2007 to 2009,  business productivity rose at a 2.4% rate, according to the official data. By comparison, the productivity growth rate was only 1.2% over the previous two years (2005-2007).

*If you like your numbers quarterly, business productivity grew at a 1.8% annual rate from the peak in 07IV to the trough in 09II.  That’s somewhat faster than the  1.6% growth rate of the previous 3 years.

*Looking at  total economy productivity–real GDP divided by full-time equivalents (FTE)–we see that productivity growth in 2007-2009, at 1.6% per year,  was double that of the previous two years (0.8% per year).

This chart breaks down productivity growth by business cycle, using the official statistics. You can see that the productivity growth of the 2007-2009 period–the worst recession in 70 years–appeared to be basically a continuation of the productivity gains during the boom. You can’t tell from this chart that anything bad happened to the economy.

The strong measured productivity growth during the crisis years reflects a steep drop in employment (-5.7%) combined with an apparently mild two-year decline in real GDP (-2.6%).  Of course, ‘apparently mild’ is still nastier than any post-war U.S. recession, but a 2.6% decline in real GDP translates into a 4.4% decline in per capita GDP, which puts the U.S. at the low end of  financial crises described by Reinhart and Rogoff.

What’s more, the 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation. 

Second, the productivity gains convinced the economists of the Obama Administration that the economy was basically sound and there was nothing wrong with  the ‘supply-side of the economy.  Instead, the Obama Administration concluded that the big problem was a demand shortfall, which is why they expected things to get back to normal after the fiscal stimulus.

Consider this April 2010 speech from Christina Romer, then head of the CEA. She said:

The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand. Despite three quarters of growth, real GDP is approximately 6 percent below its trend path. Unemployment is high fundamentally because the economy is producing dramatically below its capacity. That is, far from being “the new normal,” it is “the old cyclical.”

Perhaps more important from a political perspective, the productivity surge  helped convince the Obama economists that the job loss was ‘normal’ in some sense. That is, the rise in productivity suggests that the financial crisis apparently just accelerated the normal process of  making U.S. businesses leaner and more competitive, and there was no structural problem. In fact, that’s what Romer said in her speech:

In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

If productivity was rising, then the job loss was due to a demand shortfall and could be dealt with by stimulating aggregate demand. That, in turn, helps explain why the “job problem”  didn’t seem so urgent to the Obama administration, and why they spent more time on other policy issues such as healthcare and regulation.

[Read more...]

The End of Japan as an Industrial Power?

I don’t mean to be apocalyptic here,  in the face of the terrible tragedy hitting the Japanese people.  But I think the current crisis is going to accelerate the aging of Japanese society, especially if the nuclear disaster gets worse.  And  I’m wondering whether we are seeing the beginning of the end of Japan as an industrial power. 

Think about this from the perspective of an executive running a major Japanese manufacturer.  In the short-term, when you are facing all the problems at home,  you may find it appealing, wherever possible, to ‘temporarily’ switch over much of your production to either China or the U.S., your two major markets.  This can be justified, patriotically, as the need to keep up profits to help fund the reconstruction of Japan.

But you may not want to move that  production  back again. In the medium-term,  as you consider how much to invest in rebuilding your factories and infrastructure in Japan,  you will face a demographic problem–the coming collapse of the working-age population. Take a look at this chart:

Basically,  Japan’s working-age population is anticipated to drop by 20% over the next 20 years. And that actually understates the problem in the rural areas, which have felt a youth drain to the big cities. ( see here and here   ). 

That makes it much more attractive to invest in China and the U.S., of all places, which have more desirable demographics for both the workforce and consumption. Ten years from now, much of what is made in Japan today will be made elsewhere.  



When Did the Innovation Shortfall Start?

I’m responding to the posts by Arnold Kling and Bryan Kaplan critiquing  Tyler’s The Great Stagnation. Let me just throw out some thoughts, from the perspective of someone who thinks that The Great Stagnation is a terrific book.

1. I agree wholeheartedly with Tyler that the current crisis is a supply-side rather than a demand-side problem. That explains why the economy has responded relatively weakly to demand-side intervention.

2. From my perspective,  the innovation slowdown started in 1998 or 2000, rather than 1973–sorry, Tyler.  The slowdown was mainly concentrated in the biosciences, reflected in statistics like a slowdown in new drug approvals, slow or no gains in death rates for many age groups (see my post here),  and low or negative productivity in healthcare (see David Cutler on this and my post here).  This is a chart I ran in January 2010 (the 2007 death rate has been revised up a bit since then)–it shows a steady decline in the death rate for Americans aged 45-54 until the late 1990s.

The innovation slowdown was also reflected in the slow job growth in innovative industries, and the sharp decline in real wages for young college graduates (see my post here). (Young college grads, because they have no investment in legacy sectors, inevitably flock to the dynamic and innovative industries in the economy. If their real wages are falling, it’s because the innovative industries are few and far between).

3. The apparent productivity gains over the past ten years have been a statistical fluke caused in large part by the inability of our statistical system to cope with globalization, including: The lack of any direct price comparisons between imported and comparable domestic goods and services; systematic biases in the import price statistics (see Houseman et al  here, for example); and no tracking of knowledge capital flows. I’ve got several posts coming on this soon.

4. I agree with Tyler that regulation of innovation is a big problem.  That’s why I’ve suggested a new process, a Regulatory Improvement Commission,  for reforming selected regulations.

5. I’m of the view that we may be close to another wave of innovation, centered in the biosciences, that will drive growth and job creation over the medium run.  If we want growth and rising living standards, we need to avoid adding on well-meaning regulations that drive up the cost of innovation.

Archives

Follow

Get every new post delivered to your Inbox.

Join 65 other followers