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.


My Review of Tyler Cowen’s New Book

Tyler Cowen’s new book, The Great Stagnation, is terrific. If you want to understand what’s going on with the economy, you should buy it right now. In fact, buy two.

Oh, oh, I’m supposed to write more? Ok.

I should start by saying that if I was still writing for BusinessWeek, I would never be allowed to review Tyler’s book, because he cites me copiously and even graciously dedicates it to “Michael Mandel  and Peter Theil, who have blazed the way.”  (Thank you!) But the fact is, The Great Stagnation is so important and so readable that I’m going to violate every possible  conflict of interest rule.

Since 2009, I’ve been arguing that there’s an innovation slowdown which is the root cause of many of our current economics ills (See here for the  June 2009 BusinessWeek cover story, “Innovation Interrupted”)*.  Since then I’ve been writing and blogging about the  innovation shortfall thesis. (For example, in March 2010 I wrote a policy memo for the Progressive Policy Institute titled “Why the Jobs Crisis is Actually an Innovation Crisis”)

That’s why I was so pleased to see Tyler’s new book. He incorporates my original innovation shortfall thesis–which mainly focuses on technological change over the past decade–into a much broader argument that stretches back forty years. What’s more, he does a great job of making his case in clear terms (readable!). Tyler argues:

…the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That’s it that is what has gone wrong….there are periodic technological plateaus, and right now we are sitting on top of one, waiting for the next major growth revolution.

Why is Tyler’s “technological plateau”  so important? It gives you a coherent explanation of how we got into this mess. Tyler writes:

In essence, we’ve been making plans—whether consciously or not—as if we would have ongoing productivity growth of 3 percent or more, along with the asset prices that would accompany such a boom. When you combine plans based on 3 percent gains with a reality of much inferior performance, sooner or later you get a crash.

In other words, it was a collective misperception of current growth rates.

We were all, more or less, overconfident. It gets increasingly harder for me to escape the conclusion that many millions of people were complicit, whether intentionally or not.

Going forward, Tyler raises several important questions.  How do we encourage technological progress? How do we manage slow growth? And if and when we get a new round of technological breakthroughs, how do we manage those?  These are his suggestions

  • Raise the social status of scientists
  • Be part of the solution to the current rancor, not part of the problem. Don’t demonize those you disagree with.
  • Have realistic expectations.
  • Be ready for when more low-hanging fruit actually arrives because sometimes low-hanging fruit is dangerous
  • Be prepared for a recession that could last longer than we are used to.

Let me comment on two of these. First, the point about raising the social status of scientists. In his state of the union address, President Obama made a big deal about innovation. But he did not highlight a single current scientist. Instead, he featured two brothers,  Robert and Gary Allen, who own a  Michigan roofing company.  Good politics–but perhaps not the right message to kids.  

Second, don’t demonize those you disagree with. The point Tyler is making that politics becomes a lot harder in a slow-growth economy, where expectations have to be ratcheted down.  The center has a real purpose.

Finally, Tyler wrote this book in a short Kindle e-book format. It’s worth getting a Kindle just to read his book –I did!