High Wages encourage Innovation?

Note: pretty wonky blog by "mostly Canadian economists"...but, as the Wizard tells Willow regarding the Birds of math: Ignore the Bird, Follow the River....

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High Wages encourage Innovation?

High wages increase the benefits of an innovation that increases labour productivity. The higher the wage, the bigger the benefits of saving an hour of labour to produce the same quantity of goods. But if that innovation itself requires labour to think up the new idea, test it, and implement it, then high wages increase the costs of innovation too. If benefits and costs increase by the same percentage, high wages will have zero effect on the number of innovations that pass the expected benefits > expected costs hurdle, and so zero effect on the number of innovations that would be implemented.

Think of a simple economy where land and labour produce food. At the aggregate level, what matters is whether innovation itself is more or less labour-intensive than the economy as a whole (or those sectors of the economy to which innovation might be applied). Think of an experimental trying out a new variety of wheat using the same labour/land ratio as the economy uses for existing varieties of wheat. The cost of the experiment is the opportunity cost of the existing wheat that could have been grown on the experimental plot of land using the experimental labour. The expected benefit of the experiment is the increased yield if the new variety is a success. The relative scarcity of labour to land, and the relative wage/rent ratio, has zero effect on the expected net benefits of doing the experiment. What does matter is the real rate of interest (the nominal rate minus the expected inflation rate on wheat). Because the costs of the experiment come this year, but the expected benefits of the experiment come in many future years. It is low interest rates, and not high wages, that should encourage innovation. Innovation is an investment.

Sure, innovators are looking at the expected benefits of innovation, and don't know the actual benefits. So it is always possible that labour-saving innovations will have a higher success rate than the innovators expected, and land-saving innovations will have a lower success rate than the innovators expected. If so, higher wages (and lower land rents) may cause innovators to start looking for gold in the exact place where the gold happens to be hiding. Just by luck. But it could easily have been the other way around.

Suppose that innovation, by its very nature, is a very labour-intensive activity. That sounds plausible to me. It takes a lot of labour, and very little land, to do the thinking, and measuring, and recording, and whatever, to find a new variety of wheat that works better than existing varieties. In that case, high wages would increase the costs of innovation by a greater percentage than they would increase the benefits of innovation. So for the marginal innovation, where the Expected Net Present Value was just barely positive, would become negative if wages increased. So fewer innovations would pass the E[NPV] > 0 hurdle if wages rose. If innovation itself is very labour-intensive, high wages discourage innovation.

You want to talk about skilled labour vs unskilled labour? Sure. If innovation requires skilled labour and saves unskilled labour, then a fall in the ratio of skilled to unskilled wages (a rise in the ratio of unskilled to skilled wages) will encourage innovation. But talk about that ratio; don't talk about just "wages".

And don't get me started on "capital"-saving innovation, because "capital" is the time-structure of production. Whenever you start a production process that has present costs and future benefits, you have capital. And the innovation itself is a capital project. And the benefits of innovation will probably outlast any production process it modifies. So a fall in the rate of interest will promote all innovation, including innovation that is purely "capital-saving". And if the real interest rate is negative, so it is profitable to store wheat even if some wheat does get lost in storage, then innovation that lengthens the production process (is the reverse of "capital-saving") is a good innovation. It means you can store wheat for longer before it rots.

I know little about economic history, and even less about innovation. But something about this "high wages encourage innovation" meme doesn't sound right to me.

[Update: Take the simplest case: an innovation costs C units of labour to implement, and benefits by saving B units of labour per year forever. No other costs or benefits. The wage is W, and interest rate is r. The Net Present Value of implementing is

NPV = WB/r - WC = W(B/r - C)

You don't need to know W to tell whether NPV > 0. All that matters is whether B/r > C.

Line up all the possible innovations, from the highest to the lowest NPV (NPV on the Y axis). The NPV curve slopes down, and crosses the X axis, because some projects have negative NPV. We implement if NPV > 0.

An increase in W does not shift the NPV curve up. It causes the NPV curve to swivel clockwise, around the point where it crosses the X axis. It has no effect on the percentage of projects that are profitable. A fall in r is what shifts the NPV curve up.]

--

John Case
Harpers Ferry, WV

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ProMarket: “Our New Economy Enables the Winners to Capture Much More of the Welfare”

ProMarket: 

"Our New Economy Enables the Winners to Capture Much More of the Welfare"

Posted on April 4, 2017 by ProMarket writers

In this installment of ProMarket's new interview series on concentration in America, Ariel Ezrachi and Maurice Stucke discuss bigness, market power, and the digital economy. "[The] lack of online competition between the leading platforms affects offline welfare and democracy."

Does America have a concentration problem? On March 27-29, the Stigler Center hosted a first-of-its-kind, three-day conference in Chicago that focused on this very question.

 

The conference brought together dozens of top academics from law, economics, history, and political science, policymakers, journalists, and public intellectuals. Ahead of this conference, we presented influential scholars and thinkers with some questions on concentration, market power, and bigness—and their potential effects on the U.S. economy.

 

You can read all previous installments here. 

---

 

Ariel Ezrachi

Ariel Ezrachi is the Slaughter and May Professor of Competition Law and a Fellow of Pembroke College, Oxford. He also serves as the Director of the University of Oxford Centre for Competition Law and Policy. His most recent work deals with the digital economy and the limits of competition law. ​

 

Maurice Stucke is a co-founder of the law firm The Konkurrenz Group and a law professor at the University of Tennessee. He has over 20 years of experience in antitrust and competition policy issues, both in private practice and as a former prosecutor at the U.S. Department of Justice. He advises governments, law firms, consumer groups, and multinational firms on competition and privacy issues. Stucke also serves as one of the United States' non-governmental advisors to the International Competition Network, as a Senior Fellow at the American Antitrust Institute, and on the boards of the Academic Society for Competition Law and the Institute for Consumer Antitrust Studies.

 

Maurice Stucke

In a series of papers published in the last two years, Ezrachi and Stucke explored the world of big data and artificial intelligence and argued that network effects can raise barriers to entry, enabling big platforms to engage in behaviors such as collusion, tacit collusion, and price discrimination, to the detriment of consumers. Their recent book Virtual Competition (Harvard University Press, 2016) explores the changing nature of competition in the age of big data and algorithms.

 

In a brief joint interview with ProMarket, Ezrachi and Stucke shared some thoughts on market power and the digital economy.

 

Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

 

Our focus in recent years has been on the digital economy. In our book Virtual Competition we explore, in detail, the increased concentration and economic power of very few companies and the way it affects our welfare and society. When one focuses on online markets it is easy to identify the shift in power to a few super-platforms. We are in the midst of a process of migration to online interfaces, smartphones, and tablets and increased reliance on a handful of super-platforms, which in controlling our interfaces, can affect our access to information, goods, services. As we explored elsewhere, the power they possess enables them to engage in these strategies in stealth mode—while creating a mirage of choice and competition. 

 

Q: Which industries should we be concerned with when we look at questions of concentration? Do we have evidence of excessive market power, reduction in quality or investment, or growing political influence?

 

Our research focuses on competition and the digital economy. In this area, we certainly identify increased concentration. The existence of several leading online gatekeepers enables them to affect the dynamics of competition and possible entry. The power, which is supported by network effects, big data, and big analytics, may enable a handful of companies to manipulate the market for goods, services, and ideas. With respect to the latter, it is interesting to note our growing reliance on online outlets for news. As we explored recently, lack of online competition between the leading platforms affects offline welfare and democracy.

 

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

 

Yes and no. Big Data and Competition Policy explores several challenges. One challenge is the "nowcasting radar." Before the Big Data era, dominant tech firms were less aware of what their customers and rivals were doing (or planning to do). As Big Data and Competition Policy discusses, some platforms have a relative advantage in accessing and analyzing data to discern consumer trends well before others. Companies can nowcast, i.e., "predict the present" by using search inquiries, social network postings, tweets, etc. 

 

Nowcasting can yield a competitive advantage (and, at times, increase overall welfare). In monitoring search queries, Google can predict flu outbreaks well before the government health agencies can. Twitter's data can help companies identify emerging trends. Google and Apple, in controlling the mobile phone app stores, immediately know when users download rivals' apps.

 

Nowcasting also represents a potent data-based weapon, not previously available for monopolies, to monitor new business models in real time. The nowcasting radar can help some dominant firm identify nascent competitive threats. The data-opoly can use its relative advantage in accessing and processing personal data (such as watching for trends in its proprietary data from posts on a social network, search queries, emails, etc) to quickly identify (and squelch) nascent competitive threats. The dominant firm can acquire entrants before they become significant competitive threats or blunt the entrant's growth (such as manipulating its search engine results to make it harder to find the company). For example, Facebook warns its investors that its platform partners may use information shared by its users through the Facebook Platform to develop products or features that compete with Facebook.

 

Thus, it is as if the monopoly invented a radar system to monitor in real time the competitive portals. It can track nascent competitive threats shortly after they take off, and intercept or shoot them down long before they become visible to regulators and others.

 

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

 

Peter Thiel, the successful venture capitalist, famously noted that 'Competition Is for Losers.' That useful phrase captures the essence of many technology markets. Markets in which the winner of the competitive process is able to cement its position and protect it. Using data-driven network effects, it can undermine new entry attempts. Using deep pockets and the nowcasting radar, the dominant firm can purchase disruptive innovators.

 

Our new economy enables the winners to capture much more of the welfare. They are able to affect downstream competition as well as upstream providers. Often, they can do so with limited resistance from governmental agencies, as power in the online economy is not always easily captured using traditional competition analysis. Digital personal assistants, as we explore, have the potential to strengthen the winner's gatekeeper power.

 

Q: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

 

That will depend on several factors, including the intellectual leadership brought to the DOJ and FTC, their willingness to reexamine the "antitrust light" policies of the past, and the courts' willingness to listen.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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Bernstein/Spielberg: The Progressive Agenda Now: Jobs and Medicare for All

The Progressive Agenda Now: Jobs and Medicare for All

JARED BERNSTEIN & BEN SPIELBERG

APRIL 3, 2017

Playing defense is necessary, but Democrats need some compelling ideas on offense as well.

The coming years will require progressives to play extremely tough defense if we hope to preserve gains we've made. That means highlighting the disconnect between the promises that Donald Trump and Republican lawmakers have made and their actual proposals, and hammering home who their plans are designed to help: people who are already very wealthy. It also means mobilizing in our communities to exert pressure on politicians, as progressives did with considerable success during the recent health-care debate.

But it's obvious that defense isn't enough. To win over and mobilize the public, social justice advocates must articulate what we're for, not just what we're against. The American people deserve better than what's currently on offer from team Trump, but for many, the status quo also falls short. If progressives are to fulfill one of our core principles—the use of public policy to improve the lives of those left out or underserved by the market economy—we need a simple, plausible plan that excites people. Two key components of that plan are Medicare for All and a guaranteed jobs program.

A Medicare for All health-care system

Republican complaints about Obamacare never passed the laugh test. Some, like the claim that it was killing jobs, were completely unfounded. Others, like the GOP's frequent reminders that millions of Americans remain uninsured, were hypocritical to the extreme. Their own bill proposed knocking 24 million people off of coverage. And it's because of Republican opposition that 19 states and millions of Americans still don't benefit from the Medicaid expansion.

The public's rejection of the House GOP's draconian Obamacare replacement bill was notable. "Trumpcare's failure proved, in the most emphatic way possible, that you can't go further right than the Affordable Care Act without starting to drop people en masse from health insurance coverage," The New Republic's Sarah Jones pointed out. "[I]f you want to improve health care in this country, there is nowhere else to go but left."

We agree. The Affordable Care Act led to historic gains in coverage and slowed down the growth in health-care costs. But one can applaud and work to build on those gains while also noting that our system continues to leave millions of people uninsured and many more with high deductibles, co-pays, and premiums (even after accounting for government subsidies).

We can improve the current system by getting the Medicaid expansion into the 19 states that haven't yet adopted it (for which there now appears to be budding support), introducing a public option into the insurance exchanges (as former President Obama himself suggested last year), improving outreach and assistance efforts, and raising marketplace subsidies to lower out-of-pocket costs.

But we should also aim higher, building off the compelling fact that other countries already provide universal or near-universal coverage to their citizens while spending about half of what we do as a share of GDP. Their approaches vary, but a common thread unites them: an increased role for the public sector, either as regulator, price-setter, insurer, provider, or some combination thereof. In fact, there are sound economic reasons that health insurance belongs in the public sphere. For one thing, consumers lack sufficient information to make welfare-maximizing choices in private markets. For another, the unpredictable nature of health care needs and the lack of incentives to cover sick people make a large risk pool optimal. It should come as no surprise that our own government-run health programs, Medicare and Medicaid, are both far more popular and more cost-efficient than private insurance in this country.

How to get from where we are to Medicare for All is a huge challenge. Paul Starr recently suggested a smart, incremental step in the Prospect: "Midlife Medicare," which extends the system to 50- to 64-year-olds without employer coverage. Demos strategist Vijay Das recommends expanding Medicare first to kids. In a political climate where some conservatives want to cut social insurance, these ideas provide examples of turning from defense—"hands off Medicare!"—to offense: expand Medicare's eligibility.

A federal job guarantee

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One of the many bad ideas in the failed Republican health-care bill was a Medicaid work requirement. As we explained in a recent op-ed, most people who can work already do, and those who don't are often faced with a lack of available jobs, transportation options, child-care services, or other work supports.

Lawmakers serious about providing work opportunities for people, rather than unnecessary and unrealistic requirements, should instead back a federal job guarantee. This proposal, outlined recently by Mark Paul, Sandy Darity, and Darrick Hamilton in Jacobin and by Jeff Spross in Democracy, is straightforward: the federal government would provide a job, with salary and benefits, to anyone who wanted one and didn't have one. A job guarantee could simultaneously lower un- and underemployment while providing critically needed labor in fields ranging from infrastructure to education to child and elder care.

A federal job guarantee would also be a useful program during recessions; when private-sector employment took a hit, public-sector employment could grow to offset the lost demand. It would help stabilize the economy while significantly reducing poverty and replacing the opportunities swallowed up by recession.

Making The Case

The arguments against these ideas would tend to fall into two familiar categories: "They require too much government" and "They're too expensive."

On the first objection, the government is already present, if not always accounted for. The idea of health care as a right is embodied in the fact that hospitals must treat the ill, regardless of their ability to pay. Half of our spending on health is already in the public sector. We already recognize health care's non-market attributes.

That's less the case with jobs, but think of it this way: When credit markets fail to provide enough capital to keep commerce humming along, it is widely agreed that the Federal Reserve must step in as the lender of last resort. Having conceded government's responsibility for boosting commerce, why not for labor? When the job market fails to provide adequate employment opportunities, as is the case even today when the national unemployment rate is quite low, there is a role for government to make up the difference.

As to cost—the second objection—funding these policies would indeed require significant tax hikes. The sharp rise in inequality in both pre-tax income and wealth suggests that progressive tax increases—ones that ask the most from those with the greatest ability to pay—are the right place to start. We should not kid ourselves into thinking, however, that we can pay for Medicare for All and a jobs guarantee solely by taxing the rich.

Yet we must consider not just the tax side—there's the benefit side of the equation, too! Part of our job must be to help people understand the benefits they'd receive from Medicare For All and a job guarantee. Analyses of Medicare for All-type programs conducted over the years, for instance, typically predict that low- and moderate-income Americans would see net savings. And we should not underestimate the consumer benefits of simplifying our complex, hybrid health-care system by significantly limiting the role of private insurers.

Many Americans, especially those left behind by structural economic changes that have undermined their economic opportunity, might also be deeply relieved and thus willing to help pay for an employment system that essentially took job insecurity off the table.

We recognize that the devil is often in the details and that we're talking about these two policies at a fairly abstract level. There's a great deal of analytic work to be done before we can fully enumerate their costs and benefits. Moreover, given our current president and Congress, we're a long way away from getting even incremental improvements to our laws on the books, let alone big overhauls like Medicare for All or a job guarantee.

But our fight against the bad ideas Republican lawmakers propose will be decidedly stronger if we simultaneously lay the groundwork for the good ideas the American people deserve.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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Bernstein: Barriers to opportunity in today’s America

Barriers to opportunity in today's America  

via the Washington Post

By Jared Bernstein


Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book 'The Reconnection Agenda: Reuniting Growth and Prosperity.'



I need a Trumpcation, by which I definitely do not mean a weekend in Mar-a-Lago, but a break from the chaos wrought by the administration.

To be clear, I'm not getting out of the vigilant oversight business, especially regarding attempts to sabotagethe Affordable Care Act or pass big, wasteful, regressive tax cuts. But it's also important to play offense, or at least describe what that would look like.

There are different ways to play offense in political economy, two of which are the inside and outside game. Ben Spielberg and I have a piece in the American Prospect on the outside game, an ambitious program calling for Medicare for All and a guaranteed job. On the inside, I'm testifying this week before the Joint Economic Committee at a hearing on ideas to improve economic opportunity in America. I'll summarize my testimony here after the hearing, but for now, let me set the table with a discussion about what I think we're talking about when we talk about opportunity and present some indicators intended to underscore the nature of the problem. I'll follow this up with a robust set of policy ideas intended to take down these barriers. And, getting back to defense, I'll include ways in which conservatives' current agenda is far more likely to bolster than to remove opportunity barriers.

There is no fixed definition of economic opportunity, but to my mind it corresponds to the realization of personal potential. If a child faces an inadequate school system, or a toxic environment, it will be much harder for her to realize her intellectual and, later, economic potential. If a parent lives in a community with an insufficient quantity of jobs, or jobs that pay wages that are too low to support a family, or jobs for which she lacks the necessary skills, both she and her family arguably face opportunity shortfalls. Such barriers can meaningfully be extended beyond schooling and jobs to housing, nutrition, health care and even infrastructure.

For example, consider the fact that due to toxic infrastructure — lead leaching into water pipes — children in parts of our country will suffer brain impairments (though, importantly, such damage need not be permanent). This is a clear example of an opportunity barrier constructed by a public policy failure, one that should be unacceptable in an economy as wealthy as our own. This framing of the problem suggests that a clear role for policy in the opportunity space is to take down the barriers that get between people and the realization of their economic potential. But how steep and extensive are the barriers to opportunity in today's America? Here's a list of some of the indicators, along with the variables with which they're associated.

Labor market barriers associated income, race and education:

 Federal Reserve Chair Janet Yellen recently noted that unemployment rates "averaged 13 percent in low- and moderate income communities from 2011 through 2015, compared with 7.3 percent in higher-income communities." Yellen also noted that in majority-minority areas, the jobless rate was 14.3 percent, 2011-15. The share of 25- to 54-year-old workers in these areas was nearly 9 percentage points lower than in non-majority-minority communities. Racial disparities exist in unemployment rates even controlling for education. Among whites with terminal high school degrees, unemployment was about 5 percent in 2015. For blacks, it was twice that level. Blacks with at least bachelor's degrees have unemployment rates of 4.1 percent compared with 2.4 percent for whites with at least bachelor's degrees.

Labor market barriers associated with rural areas: My own work has documented periods of slack labor markets over much of the past few decades, and their negative impact on the earnings and income growth of low- and moderate-income working families. More recently, there has been analysis of different trends in employment in rural, or non-metro, labor market indicators, and those from metro areas.

The figure below shows employment growth in rural and metro areas, with both indexed to 100 in 2008 Q1. While employment levels fell about the same amount in percentage terms in both areas over the deep recession, 2007-09, metro employment has recovered much more quickly, as the gap at the end of the figure reveals. By the middle of 2016, rural employment was still well below its pre-recession peak. Labor force participation trends reveal a similar gap (while population growth has stagnated in rural areas, the labor force has declined).

Source: USDA

Mobility barriers associated with regional economic segregation. In recent decades, families with children have experienced increased income segregation across place, driven by rising income inequality and by wealthier parents segregating themselves into areas with higher-performing schools. Researcher Ann Owens connects this development to diminished future opportunities for children: "Rising income inequality provided high-income households more resources, and parents used these resources to purchase housing in particular neighborhoods, with residential decisions structured, in part, by school district boundaries. Overall, results indicate that children face greater and increasing stratification in neighborhood contexts than do all residents, and this has implications for growing inequalities in their future outcomes." 

Education barriers associated with income: Close to 100 percent of children of parents with higher incomes/education pursued higher education, and 60 percent earned a bachelor's degree. Among children of parents with lower incomes/education, 72 percent pursued higher education and only 14 percent completed a BA. The figure below shows that the likelihood of a child from a wealthy family will attend an Ivy League or similarly elite school is 50 times that of a child from a low-income family.

Source: Chetty et al.

Mobility barriers associated with income, inequality and inadequate investments in children. While higher educational attainment is clearly associated with higher earnings, it is also the case that children who grow up in affluent households but do not graduate from college are 2.5 times as likely to have high incomes in adulthood as children who grow up poor but do graduate from college (see next figure). Recent research by Raj Chetty and others finds correlations between higher inequality and lower mobility. Chetty finds that as inequality has increased over time, one metric of mobility — the likelihood that adult children outearn their parents — has fallen, and that rising inequality explains 70 percent of the increase. One reason this relationship might exist is because when less GDP growth flows to lower-income families, their abilities to overcome mobility barriers — to move to opportunity, to invest in their children's future, to avoid the negative externalities of difficult neighborhoods — is diminished.

In fact, growing inequality is associated with less investment in children. In the early 1970s, high-income families spent four times what low-income families spent on "enrichment goods" for their kids (tutoring, books, trips, art supplies); in the mid-2000s, they spent seven times as much. Other Organization for Economic Cooperation and Development countries spend five times what we spend on young children, often through prekindergarten education, despite solid research showing the benefit-cost ratio of such spending to be more than 8 to 1.

Employment and opportunity barriers associated with the criminal justice system. The National Employment Law Project reports that 70 million people in the country have a conviction or arrest history that can show up on a routine background check for employment. NELP also points out that more employers are conducting background checks wherein these records are likely to show up. Research reported by myself and Ben Spielberg show extensive employment and earnings disadvantages for those with criminal records, with serious negative spillovers to the families of those who face incarceration. The opportunity/mobility costs of having a criminal record is high: Men with criminal records are twice as likely to remain in the bottom-fifth of the income scale relative to men without records. The fact that these problems disproportionately affect racial minorities is partially a function of institutionalized racism associated with the criminal justice system, so the barrier of discrimination is germane here, as well.

Those are at least some of the barriers blocking opportunity today. How to wield public policy to reduce them is the subject of my testimony and while I'm sure the anticipation is killing you, you'll just have to wait for my next installment.--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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IMF: Chart of the Week: Slowing Productivity: Why It Matters and What To Do [feedly]

The slowdown in productivity appears more and more to be a global feature of advanced capitalist economies. China is still engaged in a rapid industrialization restructuring and the slowdown has not showed up there yet. I see it has reached the top of the IMF's list of concerns....

Chart of the Week: Slowing Productivity: Why It Matters and What To Do
https://blog-imfdirect.imf.org/2017/04/03/chart-of-the-week-slowing-productivity-why-it-matters-and-what-to-do/

By IMFBlog

Output per worker and total factor productivity have slowed sharply over the past decade in most advanced economies and many emerging and developing countries.

Even before the global financial crisis, productivity growth showed signs of slowing in many advanced economies. But in the aftermath of the crisis, there was a further, abrupt deceleration.

Unlike normal economic slowdowns, deep recessions leave long-lasting scars on total factor productivity, as this chart shows. The global financial crisis was no different.

Consider, for example, the impact of the credit crunch on advanced economy firms that had entered the crisis with high levels of debt. These companies were often forced into fire sales of assets and deep cuts in investment, including in innovation—with lasting effects on their own and aggregate productivity.

Subdued productivity is a cause for concern, according to a new IMF paper. Another decade of weak productivity growth could seriously threaten progress in raising global living standards. Slower growth would also make it more difficult to sustain existing private and public debt levels in some countries—which could jeopardize their financial stability.

Moving the productivity needle should be a policy priority.

For advanced economies, this starts with boosting demand and investment where it remains weak; helping firms restructure debt and strengthen bank balance sheets; and giving clear signals about future economic policy, in particular fiscal, regulatory, and trade policies.

Structural reforms are also needed to tackle the structural headwinds that will constrain productivity growth—aging, the global trade slowdown, and slowing improvements in educational attainment.

Read about slowing productivity and what can be done about it in this new IMF paper.

You can also read the speech by the IMF Managing Director Christine Lagarde on "Reinvigorating Productivity Growth."

 -- via my feedly newsfeed

Dan Little: Understanding Society:Observation, measurement, and explanation

Observation, measurement, and explanation

An earlier post reiterated my reasons for doubting that the social sciences can in principle give rise to general theories that serve to organize and predict the domain of social phenomena. The causes of social events are too heterogeneous and conjunctural to permit this kind of systematic representation.

That said, social behavior and social processes give rise to very interesting patterns at the macro scale. And it is always legitimate to ask what the causes are that produce these patterns. Consider the following graphs. They are drawn very miscellaneously from a range of social science disciplines.

These graphs represent many different kinds of social behavior and processes. A few are synchronic -- snapshots of a variable at a moment in time. The graph of India's population age structure falls in this category, as do the graphs of India's literacy rates. Most are diachronic, representing change over time. The majority show an apparent pattern of stochastic change, even in cases where there is also a measurable direction of change indicating underlying persistent causes. Graphs of stock market activity fall in this category, with random variations of prices even during a consistent period of rising or falling prices.

The graph representing the evolution of China's agricultural economy tells an interesting and complicated story. It shows rising productivity in agriculture and (since 1984) a sharp decline in the proportion of the labor force involved in agriculture -- an important cause of China's urban growth and the growth of its internal migrant population. And it shows a long-term decline in the share of the national economy played by agricultural production overall, from about 40% in 1969 to less than 15% in 2005. What these statistics convey is a period of fundamental change in China, in economy, urbanization, and ultimately in politics.

The graph of the composition of the US population is a time series graph that tells a complicated story as well -- a smooth rise in total national population composed of shifting shares of population across the regions of the country. These shifts of population shares across the region's of the country demand historical and causal explanation.

The graph of India's literacy rates over age warrants comment. It appears to give a valid indication of several important social realities -- a persistent gap between men and women of all ages, and lower literacy among older men and women. But the graph also displays variation that can only reflect some sort of artifact from the data collection: literacy rates plummet at the decade and half decade, for both men and women. Plainly there is a problem with the data represented in this graph; nothing could explain a 15% discrepancy in literacy rates between 57-year-old men and 60-year-old men. The same anomalous pattern is evident in the female graph as well. Essentially there are two distinct data series represented here: the decade and half-decade series (low) and the by-year series (high). There is no way of telling from the graph which series should be given greater credibility. The other chart representing state literacy rates is of interest as well. It allows us to see that there are substantial gaps across states in terms of literacy -- Kerala's literacy rate in 1981 is 2.5 times higher than that of Bihar in that year. And some states have made striking progress in literacy between 1981 and 2001 (Arunachal Pradhesh) while other states have shown less proportional increases (Kerala). Here though we can ask whether the order of states on the graph makes sense. The states are ranked from high to low literacy rates. Perhaps it would be more illuminating to group states by regions so it is possible to draw some inferences and comparisons about similarly situated states.

The graph representing grain price correlations across commodities in Qing China demands a different kind of explanation. We need to be able to identify a mechanism that causes prices in different places to converge to a common market price separated by the cost of transport between these places and the relative utilities of wheat, sorghum, and millet. The mechanism is that of mobile price-sensitive traders responding to information about prices in different locations. The map demonstrates the existence of these mechanisms of communication and transportation on the ground. This is a paradigm example of a mechanism-based explanation. (This example comes from Rawski and Li, eds., Chinese History in Economic Perspective (Studies on China).)

The graph representing the rank order of city sizes is perhaps the most intriguing among all of these. There is nothing inherently implausible about a population distributed across five cities of comparable size and a hundred towns of comparable size -- and yet this hypothetical case would display a size distribution radically different from the Zipf law. So what explanation is available to account for the empirical pattern almost universally observed? Various scholars have argued that the regularity is the result of very simple conditions that apply to city growth rates over time, and that the cities in a growing population will come to conform to the Zipf regularity over time  as a simple statistical consequence of size and growth (link). It is an example, perhaps, of what Schelling calls "the inescapable mathematics of musical chairs" (Micromotives and Macrobehavior).

What these examples have in common is that they illustrate two of the key tasks of the social sciences: to measure important social variables over time and space, and to identify the social mechanisms that lead to variation in these variables. There are large problems of methodology and conceptual clarification that need to be addressed in both parts of this agenda. On the side of measurement, we have the problems of arriving at consistent and revealing definitions of economic wellbeing, using incomplete historical sources to reconstruct estimates of prices and wages, and using a range of statistical methods to validate and interpret the results. And on the explanatory side, we are faced with the difficult task of reconstructing social processes and forces in the past that may have powered the changes we are able to document, and with the task of validating the hypotheses we have put forward on the basis of historical evidence.

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John Case
Harpers Ferry, WV

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