Economics

NATIONAL REVIEW ONLINE: Is Work More Like Leisure or is Leisure More Like Work?

In the News / , , / 0 Comment

This article originally appeared in National Review Online

In 1930, John Maynard Keynes predicted that over the coming century, per capita income would quadruple and that work hours would plummet. Jerry Brito observes that while this first prediction has essentially come true, the second prediction has come true in a more roundabout way. For large numbers of workers in the affluent market democracies, and in particular workers in knowledge-intensive services, the distinction between work and leisure has blurred. Professional pursuits for the most privileged workers often align with basic desires for stimulation, challenge, and camaraderie that would be met one way or another, whether on the job or off. Brito cites himself as an example of this phenomenon, as the bulk of his professional work consists of activities that he would happily engage in were he a wealthy retiree.

Tyler Cowen has discussed this same landscape in the context of “threshold earners,” i.e., people who choose not to maximize earned income, but rather to improve their quality of life. Tyler suggested that as the number of single-occupancy households increases, the share of threshold earners would increase as well, as one of the main drivers of the desire for income gains is to care for dependents. And one of Tyler’s central preoccupations is the increase in the quality and variety of leisure and consumption experiences, an enormous boon to novelty-seekers. This development implies that the opportunity cost of a work-centered lifestyle has increased, at least for the novelty-seekers who benefit from it the most.

While Jerry Brito and Tyler Cowen are optimistic about the prospect of a world in which the distinction between work and leisure has collapsed, Rob Horning offers a contrasting view. Brito and Cowen are both enthusiastic consumers and users of social media, which they see primarily as a means of discovery. Horning, however, sees social media as a means of harvesting the labor of individuals hoping to achieve self-actualization on behalf of profit-making enterprises, both directly (as Facebook and Twitter profit as their users deepen and enrich their platforms) and indirectly, as the constant process of public reinvention and taste-making helps spread new modes of consumption via viral means. I’ve expressed some gentle skepticism about the Horning thesis in the past, but the idea that social media transforms “living labor” — or self-defining activity, which includes the kinds of leisure Brito and Cowen prize most  – into “abstract labor” that, as he puts it, “can be an input to a profitable production process,” is insightful. Consider, for example, a little start-up called Mass Relevance, which harvests publicly-available user data from Facebook and Twitter to provide media companies and other clients with a rich portrait of how consumers think. Horning’s deeper point, however, is that social media is both a homogenizing force and a force that produces “an urgent need to manufacture new distinctions,” as social media participants compete to demonstrate their uniqueness. A crude way to put the difference between Brito and Cowen on the one hand and Horning on the other is that while the libertarians are inclined to believe that work is becoming more like leisure, the critic of capitalism is inclined to believe that leisure is becoming more like work.

And finally, to pivot back to Brito, the idea that some workers are choosing to earn less in return for the opportunity to engage in more self-actualizing and stimulating forms of work raises interesting questions about the tax-and-transfer state. When high human capital individuals choose not to earn as much as they can, they are making a decision to avoid paying taxes, whether or not the tax question is top of mind. The elasticity of taxable income varies across groups, as Matthew Weinzierl explains in his work on tagging, and it also varies across societies, e.g., because younger people have a more elastic labor supply than older people, there is reason to believe that labor supply in older societies in more sensitive to the tax rate. In a similar vein, changes in marginal tax rates might not have a big immediate impact on labor supply, as work patterns arguably have at least as much to do with family obligations and identity as they do with after-tax income, at least in the short-term; yet they might have a bigger impact over time, as individuals and larger communities adjust their expectations. (See Arpit Gupta’s post summarizing Raj Chetty et al. on evidence from Danish tax records.) That is, higher marginal taxes might foster a society in which mothers and fathers are more likely to want to spend another hour with their children than another hour at work, or in which people prize access to positional goods that money can’t buy (or money can’t buy easily) rather than more accessible modes of consumption. This could be a salutary development in some respects, but it will presumably mean a somewhat smaller pie, and somewhat less scope for redistribution, as money is fungible in a way that networks, relationships, and access are not.

THE NEW YORK TIMES: A Profession With an Egalitarian Core

Columns, In the News / , , / 0 Comment

This article originally appeared in The New York Times

ECONOMICS is sometimes associated with the study and defense of selfishness and material inequality, but it has an egalitarian and civil libertarian core that should be celebrated. And that core may guide us in some surprising directions.

Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality. Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people. The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.

At least since the 19th century, the interest of economists in personal liberty can be easily documented. In 1829, all 15 economists who held seats in the British Parliament voted to allow Roman Catholics as members. In 1858, the 13 economists in Parliament voted unanimously to extend full civil rights to Jews. (While both measures were approved, they were controversial among many non-economist members.) For many years leading up to the various abolitions of slavery, economists were generally critics of slavery and advocates of people’s natural equality, as documented by David M. Levy, professor of economics at George Mason University, and Sandra J. Peart, dean of the Jepson School of Leadership Studies at the University of Richmond, in “The ‘Vanity of the Philosopher’: From Equality to Hierarchy in Post-Classical Economics.”

Professors Levy and Peart coined the phrase “analytical egalitarianism” to describe the underpinnings of this tradition. For example, Adam Smith cited birth and fortune, as opposed to intrinsically different capabilities, as the primary reasons for differences in social rank. And the classical economists Jeremy Bentham and John Stuart Mill promoted equal legal and institutional rights for women long before such views were fashionable. Their utilitarian moral theories placed individuals on a par in the social calculus by asking about the greatest good for the greatest number.

Bentham and Mill didn’t support personal liberty in every instance — Mill was a proud imperialist when it came to India, and Bentham’s idea for a Panopticon prison was a model of state-sponsored surveillance. But they prepared the way for dissecting the prevailing defenses of hierarchy and injustice.

More recently, a tradition from University of Chicago economists asserts that deep down, all human beings have the same desires, even though they may face different circumstances and incentives. Gary Becker, the Nobel laureate who is one of the founders of this approach, used the economic method to lay bare the selfish motives behind racial and ethnic discrimination. And the recent Republican amicus brief endorsing gay marriage carried the signatures of two renowned economists, Harvey S. Rosen of Princeton and N. Gregory Mankiw of Harvard. (Mr. Mankiw is a regular contributor to this column.)

Often, economists spend their energies squabbling with one another, but arguably the more important contrast is between our broadly liberal economic worldview and the various alternatives — common around the globe — that postulate natural hierarchies of religion, ethnicity, caste and gender, often enforced by law and strict custom. Economists too often forget that we are part of this broader battle of ideas, and that we are winning some enduring victories.

So where will a cosmopolitan perspective take us today?

One enormous issue is international migration. A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country.

Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers.

Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized.

IN any case, there is an overriding moral issue. Imagine that it is your professional duty to report a cost-benefit analysis of liberalizing immigration policy. You wouldn’t dream of producing a study that counted “men only” or “whites only,” at least not without specific, clearly stated reasons for dividing the data.

So why report cost-benefit results only for United States citizens or residents, as is sometimes done in analyses of both international trade and migration? The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Economics evolved as a more moral and more egalitarian approach to policy than prevailed in its surrounding milieu. Let’s cherish and extend that heritage. The real contributions of economics to human welfare might turn out to be very different from what most people — even most economists — expect.

NATIONAL POST: U.S. has run out of ‘low-hanging fruit’ and needs the next generation of innovation

In the News / , , , / 0 Comment

This article originally appeared in National Post

Hailed by Foreign Policy magazine and The Economist as one of the world’s most influential thinkers, Tyler Cowen, an economics professor at George Mason University, has also won a devoted following for his writings on eclectic subjects — from American arts funding to the nature of fame and the economics of lunch. His book, The Great Stagnation, argues the U.S.’s current economic slump is just part of a decades-long period of stagnation. This is not the result of policy, but because the country has run out of “low-hanging fruit.” The National Post’s Jen Gerson interviewed Mr. Cowen before his visit to Calgary Thursday to speak in the Post-sponsored Teatro Speaker Series. Here is an edited version of their conversation.

Q Your book offers a surprising thesis for most people who are Internet addicts.

A People who love the Internet are much better off than people who do not. But if you look at the median family, they have Internet instead of TV, and their real-estate, health-care and education costs are much higher, and the net gain there isn’t that strong.

Q So having an iPhone doesn’t necessarily negate the fact it costs me a lot more to get ahead and to live, essentially?

A Correct.

Q In Canada and in the U.S., we believe getting a college education or a higher education degree is a universal good, that it will lead to a bigger middle class and a wealthier society. Your thesis seems to argue this isn’t the case.

A Obviously, it’s still better to go to college — and a lot of people who don’t go could go and should go — but it’s not going to save us. If you have a lot of stagnation, that little pie is only increasing so much and any group of people going to college doesn’t make that big of a difference.

Q There’s a notion a college education is a ticket to a middle-class life, but it seems the middle class only gets so big and then you wind up with a lot of people with a college education that doesn’t do them much good.

A You see in Europe, the Middle East and a lot of countries a large number of people with college educations and there’s literally nothing for them to do. We’re not at that stage, but education without the surrounding infrastructure is of limited value.

Q What needs to happen so the innovation jumps we’ve seen over the last 100 years can continue into the future? How do we restart this machine?

A I think a lot of it is just time. The arrival of innovations are lumpy: a big thing happens, there’s a lot of spin off and a long period of consolidation. Science hasn’t slowed down. There is still a lot of new things being discovered, but they don’t translate right away into new products. Like genomic medicine, it’s really not a thing yet, but the science is there.

So a lot of what we need to do has already been done. That’s the optimistic spin, it’s just going to take another 10 or 20 years for things to pay off. For some time to come, people are going to be very disappointed.

Q Do people need to re-adjust their expectations?

A In the meantime, absolutely. We’re spending and borrowing as if we lived in a world of 3% growth and we do not.

Q Is there anything else you’re going to discuss while in Calgary?

A Canada is a special case because it has a lot more resource wealth per capita than do most countries. Resource prices are generally high and they have been high, but the thing to keep in mind [this is] because other countries have to pay a lot for stuff. The success of Canada and Australia has, in some regards, been premised on the slowdown of other countries — that your country does better when other countries have to pay more. Canada and Australia are in fine shape, but should also be a little more nervous than they are.

THE WASHINGTON POST: Can We Ever Do Better Than the Toilet?

In the News / , , , / 0 Comment

This article originally appeared in The Washington Post

The cover story for this week’s Economist is on one of our favorite topics: the debate over the state of innovation — whether its slowing down, speeding up and what it means for economic growth. In the grand tradition of the magazine, the authors are anonymous, but there are two pieces on the debate over whether innovation has slowed. The shorter of the two asserts that we have yet to develop “an invention half as useful as” the toilet, going on to state that “the biggest danger” to the fast-flowing juices of innovation in the 21st century is government. The second, longer piece is a tour of the current debate over whether innovation and new technology have stopped fueling growth. The conclusion: take claims that innovation and new technology are no longer fueling economic growth with a grain of salt. The innovation engine continues to churn, just not in the way it once did.

“There will be more innovation,” writes the cover-story’s author, “but it will not change the way the world works in the way electricity, internal combustion engines, plumbing, petrochemicals and the telephone have.”

The longer piece also addresses the work of George Mason University professor and economist Tyler Cowen, mostly from his 2011 book titled “The Great Stagnation.” Asked what he thought of the piece, Cowen said via an e-mail Friday that he thought it was “excellent.”

He went on to say that a “key distinction” needed to be made between ”whether we have had lots of recent innovation” — he thinks we have — and “whether those innovations have much raised typical standards of living for Americans,” which he says is “much less clear.”

“Looking forward, I am optimistic actually,” Cowen said. ”Science has not stopped, it simply gets turned into practical products at a very uneven rate.  The new question will be who is poised to benefit from the forthcoming stream of advances.”

The debate over whether innovation has stalled will very likely continue well after this and many other pieces are written. That said, at least in so far as the toilet is concerned, the Gates Foundation already has an initiative to fund inventions to improve that particular technology. The Foundation’s work, however, did not make an appearance in either piece. So, while they may not be inventing something new, different and completely earth-shattering, at least there are people trying to improve on our existing commode technology.

Notable in the longer cover story, although perhaps not central to it, was this drawing of a thick line between innovation and technology:

Innovation and technology, though talked of almost interchangeably, are not the same thing. Innovation is what people newly know how to do. Technology is what they are actually doing; and that is what matters to the economy.

It’s an important distinction to consider, particularly as the consumer electronics show winds down — an event that was greeted with arelatively loud, collective yawn on the part of tech writers. The next, great, industry-transforming invention may not have been unveiled in Las Vegas this week, but an absence of new technology, as outlined above, doesn’t necessarily mean a slowing of innovation.

 

TIME: What If America’s Best Ideas Were Behind It?

In the News / , , , , / 0 Comment

This article originally appeared in Time

This is a “what if” interview from the World Economic Forum’s Risk Response Network. To view the rest of the series, click here.

As the U.S. stands at the brink of the fiscal cliff, the narratives of decline are legion. The World Economic Forum, in collaboration with TIME, spoke with Tyler Cowen, a professor of economics at George Mason University and author of The Great Stagnation, on the economic history underlying the current dysfunction. He warns that innovation in the U.S. has reached a plateau and a long period of stagnation awaits.

What makes you think America’s golden age of innovation is in the past?

I was born in 1962. When you think back to the world of my childhood, in the Sixties and Seventies, it’s not that different from the world of today, in many ways. The experience of driving a car or flying a plane hasn’t changed much. A person from that time would be able to use a modern kitchen without thinking twice. Computers represent a big difference in our daily lives, but that’s just one dynamic sector. In contrast, if you think back to the period from 1900 to 1950, everything changed, in the United States as in Western Europe: people moved off the farms, people got electricity, people got running water, people got antibiotics, people got automobiles, planes started flying, radios and televisions appeared in ordinary homes. There were huge advances in just about every sector, and we’re not keeping up with that now. We had this unprecedented burst of progress and it’s really hard to have a comparably impressive second act.

How has this played out in the economy?

Well, since the recession ended in 2009, median income has actually gone down by about five to six per cent, which is not a good sign. Over the longer term, median income now is about where it was in the late Nineties, so that’s more than a lost decade in terms of progress in living standards. Interestingly, there’s a gender split. Median male wages were actually higher in the Sixties than today, which is stunning, while women have reaped the benefits of more education. Although there have clearly been gains, overall it’s far, far slower progress than anyone expected.

Do you expect more stagnation ahead?

If you just look at the last quarter as an example, the U.S. had just two per cent GDP growth, with a huge chunk of that coming from the Defence Department, which does not represent an improvement in how people live. The recession is supposed to be over. We have slow growth – and we’re still the envy of the developed world. We’re already mired in stagnation. So I think what it will look like say 10 to 15 years down the road is that the United States will be in a fiscal position similar to where Italy is today. Italy has not had rapid economic growth for quite some time. I don’t think the U.S. will ever look like Greece or Spain, but if you spend a lot and accumulate debt and don’t have much growth, things become very dire. At some point people start wondering if you can actually pull off the mix of spending cuts and tax increases which you will need.

Why has innovation stagnated?

There’s a bunch of different reasons, but the most fundamental is that there are some plateaus beyond which further innovation is hard. So say you invent the car and then you give people cars. It’s an awesome advance. Then you spend 60 years improving cars, giving them more comfortable seats, better sound systems and side air bags, that’s all great, but it just doesn’t match up to developing cars. So, you might think that in a much longer term future, we’ll have flying cars or teleporters, and maybe we will, but that’s not in the next 10 years.

Weren’t we supposed to have flying cars by now? What happened to the utopian predictions of the Sixties?

I think back then people overestimated the extent to which we would be able to get our hands on ever cheaper and cheaper energy. Fossil fuels powered the huge advances of the first half of the twentieth century, but the same won’t be said of the twenty first century. Also, I think improving transportation is just harder than people realise. Flying cars do actually exist, but they are expensive and dangerous. Driverless cars are probably the next big advance, and those will be great, but again you are talking 20 years out from now.

Another reason for stagnation is that our educational system isn’t improving at a very rapid pace anymore. So if you look back to 1900, when only six per cent of the US population graduated from high school, you could get huge gains by just sending more smart, motivated kids to school. Now the graduation rate is in the high sixties in percentage terms. You could make sure those students are getting a better education, or you could get better at reaching out to that remaining 30% or so, but all of that is much harder to do and I would say that institutionally, we’ve not always made the best decisions compared to some other countries.

If there’s no follow-up to the great burst of innovation, what will America look like in the future?

Well, I think the most likely scenario is that computers and the internet and smart phones will continue to form a dynamic sector. Artificial intelligence will improve. You’ll have a subset of the population who are very good at using those things, and very good at working with them. It won’t be just a small handful of people — we’ll be looking at maybe ten or 20% of the population. They will become much, much wealthier. For everyone else, wages will be stagnant in real terms, with a slight decline if globalization intensifies.

Even though it’s already brought us real gains, computing is still in its infancy, I’d say. The 21st century will come down to the question: is the computer as important as fossil fuels were? The answer depends on for whom. The fossil fuel boom benefitted almost everyone, but computers may not quite work out that way.

Who will be worst off in a stagnant America?

The people who do jobs where they’re basically competing against computers or against artificial intelligence. People with good technical skills, or just people who are really good managers or marketers, will do phenomenally well.

How will this play out on the world stage?

The other developed nations, like Japan and the countries of Western Europe, will follow broadly similar patterns. In terms of America’s influence, that’s been diminishing for a while, but you have to bear in mind that other countries have been diminishing too. If you look at the difference in clout between the U.S.S.R. to Russia, that’s taken a bigger fall. China, meanwhile, is an open question. It could get a lot stronger, but it could actually get weaker too. I don’t think there’s any simple narrative.

For the last 40 years or more, the Western world hasn’t actually changed that much. Now, all of a sudden, it’s starting to change more rapidly. I think people will be surprised by just how many institutions or even countries can get left behind. That’s part of the underlying tale of the Eurozone crisis. Everyone is focused on the bond rates and the currency, overlooking the notion that the world is totally changing, and if some countries aren’t right on it, it’s going to be pretty dire for them.

What can be done to reinvigorate innovation?

We should pay greater heed to science, both in terms of its social standing, but also in terms of public policy. We should get much more serious about education. While the government does need to provide better schools, ultimately just spending more money won’t do it: it has to be a cultural shift. Some modified model of the Asian style of parenting needs to spread to more families.

On the business side, there’s too much regulation and litigation, which stifles innovation. In my view there are two main areas that we don’t regulate nearly enough: finance and climate change. In most other areas though, regulations have become obstacles, and I would get rid of 70 to 80% of them.

Is there any silver lining to a stagnant future?

Well, I sometimes say I am a wage and revenue pessimist, but a happiness optimist. I think people will adjust in a lot of ways and in fact will, on average, be happier than they are today. Looking at the US, in terms of issues like diversity and social tolerance, I think it’s a much better country than it was a few decades ago. People with stagnant wages move and breathe life into new areas. Although you can’t avoid the reality on the revenue side – people need to pay bills, governments need to pay off their debts – this isn’t just some tale of unrelenting misery.

 

NATIONAL JOURNAL: Technology Is the Way Out of Economic Doldrums

In the News / , , , , , / 0 Comment

This article originally appeared in National Journal

FAIRFAX, Va.—Tyler Cowen says he’s a “small-l libertarian,” but as the prolific George Mason University economics professor talks about jump-starting the economy, it’s clear his ideology isn’t easy to pigeonhole. Cowen says he believes government can spur innovation, but he’s skeptical of regulations and would slash 80 percent of them. In his 2011 book, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, he argues that we can fix things. The United States, he says, hasn’t lost its greatness.

Cowen, 50, earned a Ph.D. in economics at Harvard but has further-flung interests. After watching the legendary Spassky–Fischer chess match in 1972, the 10-year-old Cowen started playing the game and, five years later, became the youngest state champion in New Jersey history. He gave up chess for economics. “More interesting,” he says. “And it pays better.”

His curiosity is eclectic. His most recent book, An Economist Gets Lunch: New Rules for Everyday Foodies,explores the food marketplace, which has interested him since age 20, when he first lived abroad in Germany.

“Food is about innovation, small business and big business, entrepreneurship. How do you judge quality? Globalization. Key themes for the world.”

Edited excerpts from an interview follow.

How big an economic fix are we in?

COWEN: It depends on relative to what. We’re still one of the richest countries in the world. A lot of the nonmaterial aspects of our life have gotten a lot better, including social tolerance. So it’s hardly dystopia. But it is still the case we’re planning and spending as if we’ll grow 2 to 3 percent [annually], and we might just grow 1½ percent. That is a disaster. We are not adjusting our expectations to the reality. That said, I do think we will get out of the great stagnation. A lot of the stuff that will get us out of it, we’ve already done. 

Such as?

COWEN: The Internet. The Internet is still [a] somewhat immature technology, and you’ll see education, health care, and retail all fundamentally restructured for the better through the Internet. The Internet and smart machines, software, artificial intelligence—that conjunction of concepts is getting better rapidly. 

Can we return to economic greatness?

COWEN: We have never left greatness. In some ways, you could argue we are the only great country in the world—though Canada and Australia have good claims. In absolute terms, this country has never been better. It’s just the rate of economic improvement has slowed.

Does government have a role in spurring innovation?

COWEN: If you turn on a TV show from, say, the early 1970s, it is remarkable how much life looks familiar. You could take the people from that show and put them [here and now]. Except for computer Internet stuff, they could operate everything. That suggests progress has been slower than [since] earlier in the 20th century. But Internet, computers, artificial intelligence, smartphones—all that has been phenomenal. The government should fund science much, much more—basic research. 

Must we change our expectations of what government will do for people?

COWEN: In terms of spending and borrowing, our expectations have been out of whack with reality since the end of the Clinton administration. Now, these forthcoming technological breakthroughs will help, but we shouldn’t always assume they will translate into tax revenue. You can see a lot of great things coming and still worry about the budget. Take the music sector, which for listeners is better now than it ever has been by a lot. But the revenue in that sector has kind of collapsed. Journalism, too: A lot of stuff is great for readers, not good for revenue. It’s because of technology. We need to be very careful about equating progress with more revenue. For now, this connection between revenue and well-being is a much bigger disconnect than in the past. I sometimes say I am a “happiness optimist” but a “revenue pessimist.”        

THE NEW YORK TIMES: That Blurry Line Between Makers and Takers

Columns / , , , / 0 Comment

This article originally appeared in The New York Times

MITT ROMNEY has apologized for his depiction of 47 percent of America as wealth takers rather than wealth makers. But his blunder touched inadvertently on some discomforting truths about the importance of politics in income distribution in the United States. 

If Mr. Romney’s points were to be reformulated in a more defensible direction, the outline might look something like this:

OF MAKING AND TAKING The correct distinction is not “makers versus takers.” The problem is that taking, rather than making wealth, appears to be growing in relative influence.

Most of us are actually both makers and takers. Consider farmers who produce food and favor agricultural subsidies. The question is whether the role of wealth maker has more influence over our politics, at any given time, than does the taker role. Is public policy being adjudicated on grounds of ethics and efficiency, or is the real story about lobbying and the relative power of different interest groups?

It isn’t easy to measure whether politics is less public-spirited these days, and we should resist the tendency to idealize the past. Still, job creation, median income and other measures of economic well-being have done poorly since the late 1990s. That suggests that America isn’t paying enough attention to creating wealth and increasing general prosperity.

FOLLOW THE MONEY Seven of the 10 most affluent counties in the nation are near Washington, D.C. That means a growing number of educated people are making a very good living advising, lobbying and otherwise influencing the federal government. This is a talent drain. It’s far from obvious that we are getting better policy as a result, and true wealth creation has not kept pace.

As Matthew Yglesias, a columnist for the online magazine Slate, has pointed out, there is also a subtler point about those wealthy Virginia and Maryland counties. They have high per capita incomes, not only because they attract educated, government-oriented professionals, but also because their zoning and building codes limit the supply of low-cost housing. That’s a significant government intervention that hurts lower-income people, who must pay more. Privilege-seeking through government is often most pernicious when it has a tidy front and a well-manicured green lawn.

UNEQUAL INFLUENCE Politics based on lobbying stacks the deck against lower-income groups, who are often outmaneuvered. For instance, one of the biggest problems faced by the poor today is inadequate K-12 education. They need improved public schools, more school choice, or some mix of both. Over time, such improvements would help deal with many other social and economic issues, including global competitiveness, domestic unemployment, public health and the budget deficit, because quality education has many beneficial effects.

Instead, the current system of transfers offers to the poor various sops in place of more effective reforms. Fundamental improvements to education would involve more challenging changes to residential zoning, teacher unions and certification systems, and might also take some educational finance and control out of the hands of local municipalities. It is no surprise that well-off families want to keep a system that has done very well by them, and that the poor often lose political battles over education.

EVERYONE FEELS ENTITLED People tend to think that they have justice on their side, whether it comes to making or taking.

For example, millions of homeowners have spent hundreds of thousands of dollars on the premise that the tax deduction for mortgages will be continued. If they support a continuation of that deduction they hardly feel like brigands, even though a bipartisan consensus of economists doubts the efficiency of this tax break.

As years and decades pass, recipients of this deduction and other benefits start to see them as deeply and richly deserved. Furthermore, almost all of us reap one or more of these benefits, so few individuals are consistently opposed to all government transfers.

It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings.

A HISTORICAL PERSPECTIVE The Founding Fathers were extremely worried about the threat to society posed by corruption and privilege-seeking.

Drawing on examples going back to antiquity, they understood how unmitigated wealth-taking could create a negative and cumulatively self-reinforcing political dynamic. They also understood that the Constitution — or any constitution — would be an extremely imperfect remedy for this problem.

It is therefore correct to reject Mr. Romney’s depiction as off-base and misleading. Yet the fact that he didn’t present the truth is an indication that the problem is actually worse than many of us realize.

FOREIGN POLICY: Cheapskates, Pessimists, & Food Trucks

Columns / , / 0 Comment

This article originally appeared in Foreign Policy

In a recession, most economic sectors face hard times. Economists call this phenomenon “comovement,” and it is considered one of the most fundamental features of business cycles. Nonetheless, there are exceptions to most general principles, including this one. There are, in fact, many winners — not one — from the great crash of 2008, sectors that have shown signs of prospering in tough economic times and, more importantly, have shown signs of prospering because we have been in some tough times. If there is one strand that holds these disparate entities together, it is that all understood the zeitgeist of the downturn and knew how to profit from it. Consider the following:

–L’Oréal, one of the world’s major cosmetic manufacturers, enjoyed robust sales even in 2008. A study recently published in the Journal of Personality and Social Psychology suggests that women buy more lipstick in tough economic times to make themselves more attractive to men.

–In Greece, as the eurocrisis has progressed, booksellers report robust demand for downers, according to the New York Times – particularly the works of German philosopher Arthur Schopenhauer, a thinker renowned for his pessimistic attitude toward life.

–According to consumer research groups, diaper sales slow in difficult times, but it seems demand for diaper rash ointment goes up. The reason? Families are either changing diapers less frequently or using lower-quality diapers, thus necessitating the ointment.

–Had a Korean taco lately? If food carts are increasingly your workday lunch destination, you’re not alone. This $1 billion industry has grown 8.4 percent annually in the United States since the recession, according to market researcher IbisWorld – if only because they are cheaper than typical restaurant meals.

–In 2009, stores selling religious goods did a brisk business in St. Joseph statues, according to theNew York Times. It is reputed that burying such a statue on your property helps you sell your home.

It’s often suggested that, in the long run, the American economy will slow down as the U.S. population ages. But this won’t be bad for all businesses. Funeral homes, anyone?

The New York Times: World Hunger, The Problem Left Behind

Columns / , , , , , , , / 0 Comment

This article originally appeared in The New York Times

The drought-induced run-up in corn prices is a reminder that we’re nowhere near solving the problem of feeding the world. The price surge, the third major international food price spike in the last five years, casts more doubt on the assumption that widespread economic development leads to corresponding gains in agriculture.

The green revolution has slowed since the early 1990s, and it has become harder to bolster crop yields, as I have discussed in my book, “An Economist Gets Lunch.” And recent research by Dani Rodrik, a professorof international political economy at Harvard, indicates that agricultural productivity improvements are among the hardest to transmit from one nation to another.

For all its importance to human well-being, agriculture seems to be one of the lagging economic sectors of the last two decades. That means the problem of hunger is flaring up again, as the World Bank and several United Nations agencies have recently warned.

Consider Africa, which is often considered to have turned a corner and to be headed toward steady growth. The expansion of the African middle class and the decline in child mortality rates are both quite real, but the advances have not been balanced — and agriculture lags behind.

In a recent address, Michael Lipton, an economist and research professor at Sussex University in Britain, offered a sobering look at Africa’s agricultural productivity. He suggests that Rwanda and Ghana are gaining, but that most of the continent is not. Production and calorie intake per capita don’t seem to be higher today than they were in the early 1960s. It remains an issue how Africa’s growing population will be fed.

One huge problem is that the price of fertilizer in Africa is often two to four times the world price. Yet African soil and rainfall make much of the continent subpar for growing food. In other words, the region that probably needs fertilizer the most also has to pay the most for it, and much of Africa doesn’t have the prosperity to make this an easy stretch. The high prices result in large part from infrastructure and trade networks that aren’t developed enough to create a low-cost and competitive market. And the problem could worsen if economic troubles in China distract it from its beneficial investments in African roads and harbors.

On top of all that, many African nations have unhelpful policies toward agriculture. Malawi, for instance, subjects corn to periodic export and import restrictions as well as to price controls, all of which thwart development of a well-functioning market. When market speculators save corn in anticipation of greater scarcity, they may be punished by law. These restrictions of market incentives exacerbate the basic supply problems.

Such bottlenecks are a challenge for the future of the African economies. For comparison, the rapid expansions of economic growth in Japan, South Korea, and Taiwan were all preceded by significant progress in agricultural productivity. In these countries, higher yields created a domestic surplus for savings and investment, encouraged small-scale entrepreneurship, fostered a sense of economic security and helped the middle class expand.

In contrast, much of Africa’s growth has come from resource wealth — such as oil, diamonds, gold and strategic minerals — and, unfortunately, resource prices are notoriously volatile. Resource wealth is less well-suited to supporting sustainable democracies, because it tends to be connected with state-backed privileges and other legally entrenched entities. The Norwegian government manages its oil wealth just fine, for example, but autocracies and fledgling democracies are more likely to be corrupted.

There is no shortage of writing — often from a locavore point of view — in support of more organic methods of farming, for both developed and developing countries. These opinions recognize that current farming methods bring serious environmental problems involving water supplies, fertilizer runoff and energy use. Yet organic farming typically involves smaller yields — 5 to 34 percent lower, as estimated in a recent studyin the journal Nature, depending on the crop and the context. For all the virtues of organic approaches, it’s hard to see how global food problems can be solved by starting with a cut in yields. Claims in this area are often based on wishful thinking rather than a hard-nosed sense of what’s practical.

WHAT to do? First, put food problems higher on the agenda. In the United States, there is no general consciousness of the precarious state of global agriculture. Even in the economics profession, the field of agricultural economics is often viewed as secondary in status.

Second, the United States government should stop subsidizing its own corn-based biofuels, mainly ethanol. Today, about 40 percent of America’s field corn goes into biofuels, thanks to a subsidy and regulatory policy dating from 2005. With virtual unanimity, experts condemn these subsidies as driving up food prices, damaging land use and costing the taxpayers money. Once the energy costs of producing the biofuels are taken into account, it doesn’t even appear that this policy helps slow climate change. It has become a form of crony capitalism, at great global expense.

Today, we have two presidential candidates who both look a bit short on grand vision and transformational change. Perhaps they could look to helping solve the food problem — and making a big dent in global hunger — as America’s next beneficial legacy.

The world is not yet in that happy situation where “what’s for dinner?” is a boring question.

The Globe and Mail: The World According to Tyler Cowen

In the News / , , , , , , / 0 Comment

This article originally appeared in The Globe and Mail

He’s not as famous as Nouriel Roubini and has far fewer Twitter followers (roughly 23,000 versus 194,000 for Dr. Doom). And he hasn’t, like New York Times columnist Paul Krugman, won a Nobel prize. Yet 50-year-old Tyler Cowen is a formidable presence on the American economic landscape. Chairman of Economics at George Mason University in Virginia, he is a prolific writer and editor and blogger; his Marginal Revolution – co-written with his Canadian colleague Alex Tabarrok – is among the best read blogs in the field. His last book,The Great Stagnation, was a bestseller. His next, he told Globe and Mail reporter Michael Posner in an interview, will explore what the path out of the great stagnation will look like. Mr. Cowen will deliver a lecture Tuesday evening at Toronto’s Isabel Bader Theatre.

COWEN:When I wrote The Great Stagnation, I thought it would take 20 years for us to get out of it. Now, I think it will be 10 years. I don’t think the great run of innovation is over. I just think it’s on pause. The Western world has excellent institutions. Science is still vital. But part of our problem is behavioural – getting people to be motivated. Throwing more science at things isn’t always the answer. Insofar as I’m pessimistic, it’s behavioural issues, especially in education and health care.

 

How volatile will markets be?

We’ll see levels of market volatility and stock price collapses that will be, to many people, horrifying. So the headlines a year from now – I’m very pessimistic. But if you’re asking about the real economy several years down the road, I do not think we are headed for doom.

 

What sectors will lead the next great boom?

Artificial intelligence [AI] will be a significant breakthrough. There are new developments almost every day. Cheaper fossil fuels, particularly natural gas, will spur short-run growth. And an increasing share of national income will go to capital and high productivity. It may not feel like an end to stagnation for many workers, but in terms of aggregate output, the U.S., Canada and Mexico are poised to do extremely well. Mexico will find its way around the drug problems and become more integrated into the U.S. economy. It’s the great underrated nation in the world right now.

 

Can advances in AI create great numbers of jobs?

No. A lot of people will be hurt by it. Owners of intellectual property, and capital and manufacturing plants will do very well. Output will go up a lot. But in many areas, wages will fall and jobs will disappear. So the U.S. trend – falling labour force participating rates – will continue. But people who get quality education will be better off.

 

Many economists see China as the great growth saviour. You don’t.

You can’t grow at 10 per cent per year forever. It’s already been 30 years – the greatest growth streak in history. But China is slowing down very rapidly. It’s been investing about 50 per cent of GDP [gross domestic product] for a long time. It’s very hard to do that well. And they are massively corrupt. I tend to think they will never be as wealthy per capita as Mexico. I would call that a medium-hard landing. It’s here now. The slowdown will be very bad for parts of Africa and it will hurt Canada. But Canada has other strengths and will be fine. It will hurt Brazil and other resource-rich economies. I don’t think it will hurt the U.S. I don’t adhere to apocalyptic scenarios – no riots or rebellion. I just think they will grow much more slowly. The same thing is happening in India.

 

What’s your call on the future of the euro zone?

I think multiple countries will leave, but I’m not sure that’s the pessimistic forecast. The pessimistic forecast might be they stay in forever and all get dragged down by deflation. I’m a pessimist about the euro, but not about Europe. So the southern periphery, Spain, Italy, Greece, leave – Italy might be the first to go – and the rest stay. That will work just fine. But unless they want to give up democracy, I don’t see greater fiscal union as the answer. The economies will eventually recover. There is great human capital, a lot of strengths, and mostly good institutions. Austerity is not the main problem – it’s that their banking systems are coming apart at the seams.

 

Do you play the stock market?

I’ve been heavily in cash for some time, and paying down debt. I thought stocks were overvalued in the early part of the last decade. I was right too early, but I did not suffer in the financial crisis.

 

What’s the likelihood of a major war?

I’m worried about it, especially in the Middle East. I don’t think it would be good for the U.S. economy. Energy prices would go up. There’d be a lot of uncertainty, which the world does not need more of. And the issue of nuclear weapons is not trivial. It’s hard to get a good understanding vis-à-visIran. There’s a lot of misinformation. But we seem to be on a collision course.

 

Does it matter who wins the U.S. presidency?

It’s hard to tell. As people, [Republican leader Mitt] Romney and [U.S. President Barack] Obama are not that different. Both are in bad situations, for reasons not of their own making. If Obama wins, which seems more likely, we probably get more of the same – gridlock, nastiness. If Romney wins, we have to ask, ‘Do Republicans really mean what they’ve been saying?’ I think they don’t. It’ll be like the Bush years – right-wing versions of left-wing ideas.

 

Does Obama get enough credit for saving the global economy from collapse?

George Bush doesn’t get enough credit. He basically said, ‘This is over my head, but I’m going to back [then-U.S. Treasury Secretary Henry] Paulson and [U.S. Federal Reserve Board chairman Ben] Bernanke to the hilt,’ and he did. I give most of the credit to Bernanke. He was an absolute genius.

 

What about Russia?

I see a big brain drain, too heavy a reliance on resource prices and their politics is far from settled. And they are not reinvesting in education. So I’d say I’m a pessimist.

 

What credence do you attach to the Black Swan scenario – the possibility of a completely unanticipated event having a major impact?

It’s an interesting theory, but it’s miscategorized. These so-called unpredictable events are actually the classic events of history – war, financial panic, maybe pandemic in the future. They’re unpredictable because we make mistakes. The problem is us. They’re not actually black swans – not bolts out of the blue.

 

To what extent was America’s sense of exceptionalism damaged by 9/11, the Iraq war, and the 2008 financial debacle?

We have a much stupider version of exceptionalism now. It’s less fact-based. The better version has to do with our ability to reinvent ourselves, be self-critical and, if we screw up, come back to better ways of doing things. The stupider version is jingoistic and patriotic, and gets you into mistaken wars. So our exceptionalism has been traded in for a weaker version and it’s distressing.

 

Canadian exceptionalism often focuses on the virtues of our health-care and banking systems. Justified?

Canada has done extremely well in controlling health care costs. The question is how much is that because the system is better, and how much because health care doesn’t matter – Canadians are just healthier behaviourally. As for the banks, I’d say that when you have two countries next to each other, you’re best off if they’re run on different principles, say with respect to of risk aversion, as Canada and the U.S are. The banking systems are thus complementary. On our side, it’s not clear we’ve done anything to corral the banks. It’s not clear we will. I think we’re in denial. This is very worrying. As in the auto industry, where there is still excess capacity, the underlying problems have not gone away.

1 2 3 4 5 6 7 8 »