Friday, August 25, 2017

How the Humble Potato fuelled the Rise of Liberal Capitalism [feedly]

How the Humble Potato fuelled the Rise of Liberal Capitalism
http://www.globalpolicyjournal.com/blog/24/08/2017/how-humble-potato-fuelled-rise-liberal-capitalism

What we eat matters to us – but we're not sure whether it ought to matter to anyone else. We generally insist that our diets are our business and resent being told to eat more fruit, consume less alcohol and generally pull our socks up when it comes to dinner.

The efforts in 2012-13 by New York City mayor Michael Bloomberg to ban the sale of extra large soft drinks failed precisely because critics viewed it as an intrusion into the individual's right to make their own dietary choices. "New Yorkers need a mayor, not a nanny," shouted a full-page advert in the New York Times. And when a school near Rotherham in northern England eliminated Turkey Twizzlers and fizzy drinks from its canteen, outraged mothers rose in protest, insisting that their children had the right to eat unhealthy food.

At the same time, many Britons are troubled by reports that as a nation their fondness for sugar and disdain for exercise will eventually bankrupt the NHS; there is considerable support for the idea that very overweight people should be required to lose weight before being treated. We agree that our poor dietary choices affect everyone, but at the same time we're certain that we have a right to eat what we want.

The story about how we started to think this way about food is closely linked to the rise of the potato as a national starch. Britain's love for the potato is bound up with notions of the utilitarian value of a good diet and how a healthy citizenry is the engine room of a strong economy. To find out more about that, we need to go back to the 18th century.

Enlightened eating

Today's somewhat uneasy marriage of public health and individual choice is the result of new ideas that emerged during the Enlightenment. During the 18th century, states across Europe began to rethink the bases of national wealth and strength. At the heart of these new ideas was a new appreciation of what we would now call public health. Whereas in earlier centuries rulers wished to prevent famines that might cause public unrest, in the 18th century, politicians became increasingly convinced that national strength and economic prowess required more than an obedient population disinclined to riot.

They believed it required a healthy, vigorous, energetic workforce of soldiers and labourers. This alone would ensure the success of industry. "The true foundations of riches and power," affirmed 18th-century philanthropist Jonas Hanway, "is the number of working poor." For this reason, he concluded:

… every rational proposal for the augmentation of them merits our regard. The number of the people is confessedly the national stock: the estate, which has no body to work it, is so far good for nothing; and the same rule extends to a whole country or nation.

"There is not a single politician," agreed the Spanish thinker Joaquin Xavier de Uriz, writing in 1801, "who does not accept the clear fact that the greatest possible number of law-abiding and hard-working men constitutes the happiness, strength and wealth of any state". Statesmen and public-spirited individuals therefore devoted attention to building this healthy population. It was the productivity puzzle of the 18th century.

Clearly, to do this required an ample supply of nourishing, healthy food. There was a growing consensus across Europe that much of the population was crippling itself with poorly chosen eating habits. For instance, the renowned Scottish physician William Buchan argued this in his 1797 book Observations Concerning the Diet of the Common People. Buchan believed that most "common people" ate too much meat and white bread, and drank too much beer. They did not eat enough vegetables. The inevitable result, he stated, was ill health, with diseases such as scurvy wreaking havoc in the bodies of working men, women and children. This, in turn, undermined British trade and weakened the nation.

Feeble soldiers did not provide a reliable bulwark against attack, and sickly workers did not enable flourishing commerce. Philosophers, political economists, doctors, bureaucrats and others began to insist that strong, secure states were inconceivable without significant changes in the dietary practices of the population as a whole. But how to ensure that people were well-nourished? What sorts of food would provide a better nutritional base than beer and white bread? Buchan encouraged a diet based largely on whole grains and root vegetables – which he insisted were not only cheaper than the alternatives, but infinitely more healthful.

He was particularly enthusiastic about potatoes. "What a treasure is a milch cow and a potatoe garden, to a poor man with a large family!" he exclaimed. The potato provided ideal nourishment. "Some of the stoutest men we know, are brought up on milk and potatoes," he reported. Buchan maintained that once people understood the advantages they would personally derive from a potato diet, they would happily, of their own free will, embrace the potato.

The benefits would accrue both to the individual workers and their families, whose healthy bodies would be full of vigour, and to the state and economy overall. Everyone would win. Simply enabling everyone to pursue their own self-interest would lead to a better-functioning body politic and a more productive economy.

The marvellous spud

Buchan was one of a vast number of 18th-century potato enthusiasts. Local clubs in Finland sponsored competitions aimed at encouraging peasants to grow more potatoes, Spanish newspapers explained how to boil potatoes in the Irish fashion, Italian doctors penned entire treatises on the "marvellous potato" and monarchs across Europe issued edicts encouraging everyone to grow and eat more potatoes.

In 1794, the Tuileries Gardens in Paris were dug up and turned into a potato plot. The point is that there were an awful lot of public-spirited individuals in the 18th century who were convinced that well-being and happiness, both personal and public, could be found in the humble potato.

These potato-fanciers never suggested, however, the people should be obliged to eat potatoes. Rather, they explained, patiently, in pamphlets, public lectures, sermons and advertisements, that potatoes were a nourishing, healthy food that you, personally, would eat with enjoyment. There was no need to sacrifice one's own well-being in order to ensure the well-being of the nation as a whole, since potatoes were perfectly delicious. Individual choice and public benefit were in perfect harmony. Potatoes were good for you, and they were good for the body politic.

This, of course, is more or less the approach we take to public health and healthy eating these days. We tend to favour exhortation – reduce fat! exercise more! – over outright intervention of the sort that has seen Mexico impose a 10% tax on sugary drinks, or indeed Bloomberg's soda ban.

Our hope is that public education campaigns will help people choose to eat more healthily. No one is protesting against Public Health England's Eatwell Guide, which provides advice on healthy eating, because it's useful and we're perfectly free to ignore it. Our hope is that everyone, of their own free will, will choose to adopt a more healthy diet, and that this confluence of individual good choices will lead to a stronger and more healthy nation overall. But our modern belief that a confluence of individual self-interested choices will lead to a stronger and more healthy nation originated in the new, 18th-century ideas reflected in the works of Buchan and others.

It is no coincidence that this faith in a wonderful confluence of individual choice and public good emerged at exactly the moment the tenets of modern classical economics were being developed. As Adam Smith famously argued, a well-functioning economy was the result of everyone being allowed to pursue their own self-interest. He wrote in 1776:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

The result of each person pursuing their own interest was a well-functioning economic system. As he asserted in his Theory Of Moral Sentiments:

Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Strong men and beautiful women

The best way to ensure a strong national economy, in the view of classical economists such as Adam Smith, is to let each person look after their own well-being. The worst thing the state could do was to try to intervene in the market. Interventions in the food market were seen as particularly pernicious, and likely to provoke the very shortages that they aimed to prevent. This rather novel idea began to be expressed in the early 18th century and became increasingly common as the Enlightenment progressed. As we know, faith in the free market has now become a cornerstone of modern capitalism. These ideas have profoundly shaped our world.

It was perhaps inevitable that Adam Smith should particularly recommend potatoes. His idea of the free market was premised on the conviction that national wealth was possible only when people were happy and pursued their own self-interest. Happiness and comfort, in turn, required a plentiful supply of pleasant and nutritious food – and this is what potatoes offered, in Smith's view. Not only was the potato far more productive than wheat – Smith calculated this carefully – but it was also incredibly nourishing. As he noted, "the strongest men and the most beautiful women" in Britain lived on potatoes. "No food can afford a more decisive proof of its nourishing quality, or of its being peculiarly suitable to the health of the human constitution," he concluded.

Smith linked the personal benefits individuals would derive from a greater consumption of potatoes to a greater flourishing of the economy. If planted with potatoes, agricultural land would support a larger population, and "the labourers being generally fed with potatoes" would produce a greater surplus, to the benefit of themselves, landlords and the overall economy. In Smith's vision, as in that of William Buchan and countless other potato advocates, if individuals chose to eat more potatoes, the benefits would accrue to everyone. Better input of potatoes would result in better economic outputs.

In keeping with the individualism that underpinned Smith's model of political economy, he did not recommend that people be obliged to grow and eat potatoes. His emphasis rather was on the natural confluence of individual and national interest. Indeed, potential tensions between personal and public interest were addressed directly by 18th-century potato enthusiasts, concerned precisely to see off any suggestion that they were subordinating individual freedom to collective well-being.

John Sinclair, president of the British Board of Agriculture in the 1790s, observed that some people might imagine farmers should be left to make their own decisions about whether to grow more potatoes. He conceded that: "If the public were to dictate to the farmer how he was to cultivate his grounds", this might "be the source of infinite mischief".

Providing information to inform individual choice, "instead of being mischievous, must be attended with the happiest consequences". Advice and information, rather than legislation, indeed remain the preferred techniques for transforming national food systems for most policy makers. Nutritional guidelines, not soda bans.

The 18th century thus witnessed the birth of ideas that continue to be immensely influential today. The conviction that everyone pursuing their own economic and dietary interests would lead to an overall increase in the wealth and health of nations lies at the heart of the new, 18th-century model of thinking about the economy and the state.

Potato politics

It's this idea – that private gain can lead to public benefits – that underpins the 18th-century interest in the potato as an engine for national growth. It also explains why during the 20th century, states and educational institutions across Europe established official potato research institutes, funded scientific expeditions to the Andes aimed at discovering new, more productive varieties of potato, and generally promoted potato consumption.

The British Commonwealth Potato Collection, like the German Groß Lüsewitz Potato Collection, or the Russian N.I. Vavilov Research Institute of Plant Industry, are reminders of this longer history linking potatoes, personal eating habits, and national well-being.

These connections between potatoes, political economy and a strong state moreover explain the current Chinese government's obsession with potatoes. China is now the world's leading producer of potatoes, which arrived in China in the 17th century but which have long been viewed as a food of the poor, while rice remains the prestige starch. For some decades, the Chinese state has been working to increase potato consumption and since 2014 there has been a particularly big push. There has been a great deal of pro-potato propaganda as regards both the cultivation and the consumption of the tuber.

Just as was the case in 18th-century Europe, this new Chinese potato promotion is motivated by concerns about the broader needs of the state, but it is framed in terms of how individuals will benefit from eating more potatoes. State television programmes disseminate recipes and encourage public discussion about the tastiest ways of preparing potato dishes. Cookbooks don't just describe how potatoes can help China achieve food security – they also explain that they are delicious and can cure cancer.

As in the 18th century, in today's China the idea is that everyone – you, the state, the population as a whole – benefits from these healthy eating campaigns. If everyone pursued their own self-interest, potato advocates past and present have argued, everyone would eat more potatoes and the population as a whole would be healthier. These healthier people would be able to work harder, the economy would grow and the state would be stronger. Everyone would benefit, if only everyone just followed their own individual self-interest.

The 18th century saw the emergence of a new way of thinking about the nature of the wealth and strength of the nation. These new ideas emphasised the close links between the health and economic success of individuals, and the wealth and economic strength of the state. What people ate, just like what they accomplished in the world of work, has an impact on everyone else.

At the same time, this new commercial, capitalist model was premised fundamentally on the idea of choice. Individuals should be left to pursue their own interests, whether economic or dietary. If provided sufficient latitude to do this, the theory runs, people will in the end choose an outcome that benefits everyone.

A small history of the potato allows us to see the long-term continuities that unite political economy and individual diets into a broader liberal model of the state. It also helps explain the vogue for the potato in contemporary China, itself undergoing a significant reorientation towards a market economy.

The connections between everyday life, individualism and the state forged in the late 18th century continue to shape today's debates about how to balance personal dietary freedom with the health of the body politic. The seductive promise that, collectively and individually, we can somehow eat our way to health and economic well-being remains a powerful component of our neoliberal world.

 

 

Rebecca Earle, Professor of HIstory, University of Warwick. This post first appeared on:wsfeed

Media's Biased Reporting on China Serves Only the Rich and Powerful [feedly]

Media's Biased Reporting on China Serves Only the Rich and Powerful
http://cepr.net/publications/op-eds-columns/media-s-biased-reporting-on-china-serves-only-the-rich-and-powerful

Media's Biased Reporting on China Serves Only the Rich and Powerful

Dean Baker
The Hill, August 20, 2017

See article on original site

This month, a leading newspaper ran a column bashing China by two former U.S. intelligence officials. The piece claimed that the United States loses $600 billion a year due to "intellectual property theft" and that "China accounts for most of that loss."

This was striking for two reasons. First, the number is obviously absurd. Reputable news outlets usually make writers provide some backup for the numbers they use. That doesn't seem to have been the case here. Second, if the number were plausible, the implications for policy on intellectual property and inequality would be enormous.

Starting with the absurdity of the $600 billion figure, this is more than 25 percent of the value of all U.S. exports. It's more than one-third of all after-tax corporate profits in America. Does anyone really want to argue that corporate profits in the U.S. would be one third higher if companies were paid for intellectual property that was stolen from them?

While the piece gave no source, industry groups have produced such outlandish numbers in the past by assuming that all unauthorized versions of their product would sell at the retail price in the United States. This means that if the retail price of Windows and the Microsoft Office Suite is $100, and a hundred million unauthorized copies are in use in China, they would count this as $10 billion.

Or to take another example, the Hepatitis C drug Sovaldi has a list price in the U.S. of $84,000. A high quality generic version is available in India for $300. If a million people use the Indian generic, this would count this as $84 billion of stolen property. Of course, Microsoft and Gilead Sciences (the maker of Sovaldi) would never see anything like this revenue. If the users of the allegedly stolen intellectual property (the rules are not clear) had to pay the retail price in the United States, almost none of them would buy it.

This point should be pretty obvious to anyone with even the most basic understanding of economics, so how does such an absurd number find its way into a major newspaper? It's hard not to see a pretty serious class bias problem. While many major news outlets have run pieces ridiculing efforts to reduce the trade deficit in manufacturing jobs, they are prepared to push nonsense arguments to promote the interests of the pharmaceutical industry, the software industry and the entertainment industry in trade deals.

Needless to say, all the condescending arguments made against the people pushing for more balance in manufacturing trade would apply at least as strongly in the case of their intellectual property claims. Think of how much more money developing countries would have to spend on our cutting edge manufactured products if they didn't have to pay so much money to Microsoft for its software and Pfizer for its drugs?

We also keep hearing about integrated supply chains and how they make things so complicated. Well, if we could get cheaper solar panels from Chinese manufacturers who "steal" intellectual property from companies here (according to their claims), then there will be more jobs in the U.S. for people installing solar panels here. How about some condescending news stories explaining this to the whiners pushing for stronger intellectual property rules who are too dumb to understand the simple economics?

While the double standard at work here is striking, it is worth asking for a moment what it would mean if this absurd $600 billion figure was real. If our companies are losing $600 billion to stolen intellectual property each year, then the total value of patents and copyrights and related protections in the U.S. must be at least three or four times this amount. That would put it in the neighborhood of $1.8 trillion to $2.4 trillion.

This is roughly twice the annual wage income of the bottom 50 percent of workers. It is equal to the full amount of the upward redistribution to the richest one percent over the last four decades. In other words, this is a huge amount of money. If this figure is accurate, then where were all the debates over the steps taken in the last four decades to make patents, copyrights, and related protections longer and stronger?

These protections are supposed to boost growth by providing incentives for innovation and creative work. We know that they increase inequality, since no poor person is collecting royalties or licensing fees. Bill Gates collects a lot of money this way. If we think there is so much money at stake, we should have been debating whether patent and copyright protections were leading to gains in growth that warranted the resulting increase in inequality. We didn't.

Not highlighting the distributional aspects of our policy on intellectual property is an enormous failure of the media even using the real numbers. The failure would be of gargantuan proportions if the numbers the numbers that appeared in this column bashing China were real. The media's neglect in this area serves the interests of the rich and powerful. It is not responsible reporting.


 -- via my feedly newsfeed

Higher Ed Funding Down in Nearly Every State Over Past Decade [feedly]

Higher Ed Funding Down in Nearly Every State Over Past Decade
https://www.cbpp.org/blog/higher-ed-funding-down-in-nearly-every-state-over-past-decade


A decade since the Great Recession hit, state spending on public colleges and universities remains well below historic levels, despite recent increases, our major new report details.

 -- via my feedly newsfeed

New Report Shows Cassidy-Graham Bill Would Deeply Cut Health Coverage Funding for West Virginia [feedly]

New Report Shows Cassidy-Graham Bill Would Deeply Cut Health Coverage Funding for West Virginia
http://www.wvpolicy.org/new-report-shows-cassidy-graham-bill-would-deeply-cut-health-coverage-funding-for-west-virginia/

For Immediate Release
Media Contact: Caitlin Cook304.720.8682

(Charleston, WV) – A new ACA repeal bill would cut West Virginia's federal funding for health coverage by $284 million by 2026, according to a report released today by the Center on Budget and Policy Priorities.

Congressional Republicans' efforts to repeal the Affordable Care Act (ACA) have failed in recent months in large part because a vast majority of Americans oppose taking coverage from millions of people, raising costs for millions more, gutting Medicaid and undermining consumer protections.

This has opened the door to another path: a transparent, bipartisan effort to strengthen our health care system without taking people's coverage away or gutting Medicaid. The public supports this approach and bipartisan Senate hearings slated for September offer a first step forward.
Senators Bill Cassidy and Lindsey Graham are reportedly working with the White House to block this emerging, bipartisan path and instead revive the ACA repeal effort by pushing their own version of a repeal bill, the Cassidy-Graham proposal.
"Despite claims to the contrary, the Cassidy-Graham plan is just another ACA repeal bill and would have the same devastating effects on West Virginia as the previous, failed GOP repeal bills," said Sean O'Leary of the West Virginia Center on Budget and Policy. "Like every other ACA repeal bill, it would take coverage from thousands of West Virginians and tens of millions nationwide."
The plan would eliminate the ACA Medicaid expansion, which covers 170,000 West Virginians. It would also eliminate tax credits that help 25,841 moderate-income West Virginians afford marketplace coverage and subsidies that help low-income West Virginians with out-of-pocket health costs like copays.
A far smaller block grant would replace both Medicaid expansion funding and marketplace subsidies, and the plan would also cap and deeply cut the rest of the Medicaid program just like previous Senate and House repeal bills. And, after 2026, the block grant would disappear entirely leaving West Virginians high and dry.
"The public, experts across the political spectrum, and groups representing patients, hospitals, physicians, seniors, people with disabilities and others have forcefully and repeatedly rejected this misguided approach, said O'Leary. "It's time to focus on bipartisan solutions that strengthen – rather than weaken — our health care system."
The West Virginia Center on Budget and Policy is a public policy research organization that is nonpartisan, nonprofit, and statewide. The Center focuses on how policy decisions affect all West Virginians, especially low- and moderate-income fam

 -- via my feedly newsfeed

Simon Wren-Lews: Brexit remains an exercise in deception [feedly]

Simon Wren Lewis makes an interesting observation  at the end of this post. I think the intuition of many -- including on the 'Left' -- is indeed that not only "economic theory" is "just opinion, not science". This is a product of economic issues being the major subject of most politics--the field where all interests are in contention. The same intuition that can't buy "economic science" completely disregards "political science".

One of the unfortunate ideological consequences of this "gulf in economic knowledge" is that the same intuition begins to suspect that the real economy, not just the study of it, is also just  a matter of opinion, subjectivity, and arbitrarily under the direction of whoever is most powerful, or rich. 

Let me put it this way: except in extraordinary historical moments, economic systems choose YOU. You don't choose them. It's not a buffet.

Brexit remains an exercise in deception

Simon Wren-Lewis

http://mainlymacro.blogspot.com/2017/08/brexit-remains-exercise-in-deception.html

talkedlast week about how the Leave campaign involved lies at its centre. Not the occasional exaggerations of the Remain campaign, but claiming things that were the opposite of the truth. Like there will be more money for the NHS, when in fact there will be less. That particular lie probably swung the result, accordingto the man who organised the Leave campaign.

Labour people tell me that public opinion on Brexit will turn once these lies become apparent, and at that point Labour can safely take up the Remain cause. What this overlooks is that the managing of information characterised by the Brexit campaign continues. The Tory tabloids continue to distort the truth, and the Telegraph acts in a very similar fashion. The UK government appears more interested in saying stuff to pleaseits UK audience than actually negotiating with the EU, and its studies of the impactof Brexit remain secret [1].

Meanwhile the opposition give no hint of the costs that Brexit will involve, and by designor conflicted confusion are just a tiny bit less pro-Brexit than the government. The broadcast media, and particularly the BBC, appear hopeless at questioning the facade that both main parties and supporting think tanks have erected. I have never heard a politician pulled up for saying we must retain access to the Single Market: all countries have access to that market! (Thisis the kind of journalism we should be seeing.) Individual MPs are intimidatedinto silence by the power of the Tory tabloids.

When I talk to Leave voters, all they tell me is how the economic 'catastrophe' predicted by Remain did not come to pass, or other Leave nonsense talking points like the exchange rate was overvalued anyway. They are often unaware that falling real wages are the direct result of the Brexit depreciation, and as a result the economy hardly grew in the first half of this year. They, and many people who voted Remain, do not realise that the government's position papers are largelyfantasy and that the EU is in a position to dictate terms. This is not because these voters minds are closed. They just get their information from sources that go along with the government's Brexit fantasy, unless they are fortunate enough to read the Financial Times. No wonder there has been no majorchange in public opinion since the referendum.

Those in the Labour party should realise more than most how the media can present a one-sided reality which many non-political voters accept, until they see for themselves the other side during a general election campaign. The problem with a 'wait and see' attitude to Brexit is that its major economic cost will not become apparent until years after we actually leave the Single Market. Few realise that the original Treasury study, with the central estimate of an average annual cost of £4,300 per household (6.2% of GDP) was not some piece of Remain spin but a perfectly reputable study, which economists at the LSE saidwas "overly cautious". Instead we get nonsense like thisreported by the BBC. [2]

Some time ago I calculated a conservative estimate for the cost of austerity, and it was £4,000 per household. Ironically it was based on OBR estimates that the MSM largely ignored, just as they ignore the OBR's estimates for the short term cost of Brexit. But my austerity cost estimate was a total cost, over all the years of austerity. The Treasury estimate is a cost each year. There is therefore a strong liklihood that Brexit will be far far worse than austerity in terms of lost resources, and unlike austerity there is no way of avoiding these costs once we are outside the Single Market.

For Labour party members and MPs I would put it this way. Imagine winning the next election but having to accept continuing austerity. Winning an election after leaving the Single Market will probably be much worse, and of course the media and voters will blame it all not on Brexit but on Labour's 'far left' policies. Winning an election after Brexit is a poisoned chalice.

[1] Hereis Mike Galsworthy on this and the earlier 'Balance of Competences' reviews that the government kept very quiet about before and during the referendum.

[2] I've talked to people at the BBC, including their economics editor, about why they cannot apply the BBC Trust's recommendationson science coverage to economics. (The Trust's conclusion, in summary, is that in controversial areas the BBC should go with the overwhelming scientific consensus. In other words recognise scientific knowledge, and not treat it as just an opinion.) I think a summary of their response to my question is that economics should not be regarded as a science: there is no economic knowledge, just opinions. What that attitude means in practice is that the public do not hear from the many experts in international trade we have in the UK (and there are many), but instead they hear from Patrick Minford.

 -- via my feedly newsfeed

The productivity slowdown is even more puzzling than you think | VOX, CEPR’s Policy Portal

http://voxeu.org/article/productivity-slowdown-even-more-puzzling-you-think#.WZ7AYeC56C0.gmail

The productivity slowdown is even more puzzling than you think

David Byrne, Dan Sichel 22 August 2017

The growth in labour productivity – real output per hour worked – in the US slowed markedly around 2004. During the previous ten years, labour productivity in the business sector had risen at an annual average pace of more than 3%. Productivity received a boost from innovations in the production of digital information and communications technologies (ICT) and the spreading use of ICT across all sectors of the economy. Despite the apparent continuation of the digital revolution, productivity growth slowed to about 2% a year during 2004-2010 and then dropped to a paltry pace near just 0.5% during 2010-2016. Outside the US, labour productivity growth also declined in other advanced market economies.

If sustained, this sluggish pace would have dire consequences for future gains in living standards. Over long spans of time, increases in labour productivity are the fuel that boosts living standards and the main reason that material well-being is significantly higher today than 50 or 100 years ago. At a 2% pace, labour productivity would double every 35 years, while at a 0.5% pace, that doubling would take almost 140 years.

Economists have debated the reasons for the slowdown, though no consensus has emerged. Explanations generally fall into three categories. It is attributed to either supply-side accounts pointing to factors limiting the growth rate of potential output;1 demand-side stories highlighting inadequate demand or interactions between weak demand and sluggish growth of potential output;2 or, finally, measurement explanations arguing that the tools of economic measurement have not kept up with the digital revolution and that the slowdown is a figment of poor measurement.3

We suspect that this debate will not be resolved anytime soon. That being said, we want to refocus the discussion about measurement of the digital economy. While we agree that available evidence on mismeasurement does not provide an explanation of the productivity slowdown, we also believe that biases in measures of ICT are significant and that this mismeasurement has important implications for economic growth in the future. In particular, we argue that innovation is much more rapid than would be inferred from official measures and that these on-going gains in the digital economy make the productivity slowdown even more puzzling. At the same time, we believe that this continued technical advance could provide the basis for a future pickup in productivity growth.

Are we mismeasuring the digital economy?

The short answer is yes. A key challenge to measuring changes in real GDP over time is correctly deflating nominal GDP to account for changes in prices. Getting price changes right for ICT production and investment is particularly difficult. And, as highlighted in Byrne et al. (2017), official measures of prices point to very slow rates of decline in the prices of high-tech products. But, a growing literature indicates that prices of ICT are actually falling much faster. For example, Byrne et al. (forthcoming) developed a new price index for microprocessors used in desktop computers. Their index fell at an average annual rate of 42% during 2009-13, while the most comparable official price index – the Producer Price Index – reports an average decline of 6% during the same period. Other research points to mismeasurement for other ICT products as well. Byrne and Corrado (2016) provide the best available measures of the amount of bias in official price indexes for high-tech products. Table 1 reports rates of change in official price indexes and the alternative research series for computers, communications equipment, software, and semiconductors reported by Byrne and Corrado (2016).4 As shown in the last column of the table, measurement gaps – which equal the difference between the percent changes of the official price index and the alternative research index – are sizeable for all of the high-tech products shown. Moreover, prices of many ICT products are still almost completely unstudied, including devices used in the medical, aerospace, and defence sectors and the industrial robots that have been the subject of much recent media attention.

Table 1 Official and alternative research price indexes for high-tech products, average percent change, 2004-2015

Note: Measurement gaps calculated as "official" less "alternative."

Source: Byrne et al. (2017). Official indexes for computing equipment, communications equipment, and software are from the Bureau of Economic Analysis; the official index for semiconductors is from the Bureau of Labor Statistics. Alternative research indexes are from Byrne and Corrado (2016), including some details provided by the authors that are not reported in their paper.

In addition to ICT production, the digital economy encompasses an increasingly wide range of economic activity. The list is long and includes the myriad applications delivered by internet service providers, the energy exploration that relies on world class supercomputers to process seismic data, the surging e-commerce sector cannibalising shopping malls, the Hollywood movies produced with computer-generated imagery, the high resolution MRI, CT, and sonogram images that underpin advances in medical diagnosis, and many others. Developing price indexes that capture quality change for these industries is challenging. Moreover, the deep investment in ICT in all of the industries mentioned suggests that the official prices for their output, which in most cases show little change, may be missing something important.

Does this mismeasurement explain the productivity slowdown?

No. To explain the slowdown in labour productivity, either the amount of mismeasurement of productivity growth must have increased or the share of the mismeasured sectors must have risen. And recent research by Byrne et al. (2016) and Syverson (2017) has cast doubt on mismeasurement as an explanation of the productivity slowdown. While the amount of mismeasurement has increased in some areas, there was a lot of mismeasurement of high-tech before 2004 as well. And the production of many ICT products has shifted outside the US, reducing the GDP share of these products.

This answer was confirmed by Byrne et al. (2017). They use a detailed, multi-sector growth model to decompose growth in labour productivity into contributions from capital deepening (increases in the amount of capital available to each worker) and multifactor productivity (the amount by which output changes after accounting for changes in all inputs). Figure 1 shows this decomposition using both official price indexes (upper panel) and the alternative research price indexes described above (lower panel). As can be seen, switching from official price measures to the alternative research series has relatively little effect on the pattern of labour productivity growth over time, as well as the contributions from capital deepening and multifactor productivity (MFP). Byrne et al. (2017) focused on components of GDP that have been the subject of recent research attention. It is, of course, possible that mismeasurement elsewhere (either related or not related to the tech sector) could be biasing the pattern of labour and multifactor productivity in official measures.

Figure 1 Decomposition of labour productivity growth with official and alternative research prices, 1974-2015

Source: Byrne et al. (2017).

Does this mismeasurement matter?

Again, the answer is yes. Even though the mismeasurement of high-tech prices has little effect on the pattern of labour productivity growth across time, that mismeasurement has a dramatic effect on the allocation of MFP growth across sectors. As noted, MFP growth indicates the amount by which firms get better at transforming inputs into output. Along these lines, macroeconomists often use MFP growth as a rough proxy for the pace of innovation. MFP growth can be measured by comparing the growth rate of output to a weighted average of the growth rate of inputs. It also can be measured by comparing the price of output to a weighted average of changes in the prices of inputs (the so-called 'dual' approach). Borrowing the explanation from Sichel (2017), the logic of this approach can be seen in industries that experienced rapid technological progress. With fast MFP growth, an industry will be able, over time, to produce more output from a given set of inputs. If the cost of inputs is relatively stable, then those products should see their prices fall over time. For example, telecom has seen rapid price declines in recent decades. In 1952, a ten-minute daytime phone call from New York to Los Angeles cost about $48 in 2016 dollars.5 Today, phone companies do not even bother to separately price that call, and the call can be made from almost anywhere on a mobile phone rather than from a landline phone. These rapid price declines suggest that telecom experienced substantial growth in MFP.

Byrne et al. (2017) use this dual approach to measure MFP growth in high-tech industries (which include the production of computers, communications equipment, software, and semiconductors). Figure 2 compares the estimates of MFP growth generated using official price measures (the blue cross-hatched bars) and the alternative research price indexes (the red bars). As shown, MFP growth in the high-tech sector is considerably more rapid using the alternative research prices. This pattern indicates that the innovation has been much faster in the high-tech sector than indicated by official measures and accords more consistently with casual impressions that the digital economy continues to be powered by ongoing advances.

Figure 2. Total tech sector MFP growth rates with official and alternative research prices, 1974-2015 (%)

Note: High-tech sector includes the production of computers, communications equipment, software, and semiconductors.
Source: Byrne et al. (2017).

Byrne et al. (2017) also use the dual approach to calculate the growth rate of MFP outside of the high-tech sector. As shown in Figure 3, these growth rates are much slower when the alternative research prices are used than when official measures are used. Thus, correcting the mismeasurement of high-tech prices leads to a reallocation of MFP growth across sectors toward high tech and away from the rest of the economy. This reallocation of MFP growth implies much faster innovation in the digital economy than implied by official measures.

Figure 3. Other output MFP growth rates with official and alternative research prices, 1974-2015 (%)

Source: Byrne et al. (2017).

A deeper puzzle, but hope for the future

This pattern of MFP growth makes the productivity slowdown even more puzzling. If the tech sector continues to innovate so rapidly, why has overall productivity growth been exceptionally sluggish? While it is possible that the challenges inherent in measuring output outside the ICT sector have suddenly worsened, we suspect that the answer depends importantly on the long lags necessary for innovations to diffuse through the economy and move the needle on overall productivity. This pattern of slow diffusion has been seen in the past both with electrification in the late 19th and early 20th centuries, as well as for semiconductors in the second half of the 20th century. We believe that the faster rates of innovation in high tech that are evident, once measurement biases have been corrected, could be the fuel for a future pickup in productivity growth.6

Authors' note: The views expressed in this article are those of the authors alone and not institutions with which they are affiliated. Sichel thanks the Bureau of Economic Analysis and National Telecommunications & Information Administration for financial support for related research on price measurement.

References

Branstetter, L, and D Sichel (2017), "The Case for an American Productivity Revival," Peterson Institute for International Economics Policy Brief 17-26, June.

Byrne, D M, and C Corrado (2016), "ICT Prices and ICT Services: What Do They Tell Us about Productivity and Technology?" presented at CRIW/NBER Summer Institute.

Byrne, D M, J G Fernald, and M B Reinsdorf (2016), "Does the United States have a productivity slowdown or a measurement problem?" Brookings Papers on Economic Activity 2016(1): 109-182.

Byrne, D M, S D Oliner, and D E Sichel (forthcoming), "How Fast Are Semiconductor Prices Falling?" Review of Income and Wealth, also available as FEDS working paper 2017-005, January 2017.

Byrne, D M, S D Oliner, and D E Sichel (2017), "Prices of High-Tech Products, Mismeasurement, and the Pace of Innovation", Business Economics 52(2(: 103-113.

Federal Communications Commission, Reference Book of Rates, Price Indices, and Household Expenditures for Telephone Service, March 1997.

Gordon, R J (2016), The Rise and Fall of American Economic Growth, Princeton University Press.

Mason, J W (2017), "What Recovery? The Case for Continued Expansionary Policy at the Fed," Roosevelt Institute, July 25.

Reifschneider, D, W Wascher, and D Wilcox (2013), "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," FEDS working paper no. 2013-77, November.

Sichel, D E (2017), "The Productivity Slowdown is Even More Puzzling than You Think," Econofact, May 17.

Summers, L H (2014), "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound," Business Economics 49(2): 65-73.

Syverson, C (2016), "Challenges to Mismeasurement Explanations for the U.S. Productivity Slowdown," NBER working paper 21974.

Endnotes

[1] See Gordon (2016) for one prominent version.

[2] Summers (2014) has written extensively about "secular stagnation" as an explanation. Mason (2017) and Reifschneider, Wascher, and Wilcox (2013) have argued that weak demand has restrained advances in potential output.

[3] For example, Goldman Sachs (2015 and 2016), argue that we are missing growth in key components of GDP, and Byrnjolfsson and Oh (2013) make the case that economic welfare is growing faster than real GDP.

[4] Note that the semiconductor index shown in the table incorporates the microprocessor index described above but also includes other semiconductors.

[5] For the cost in 1952, see Federal Communications Commission (1997: 62). The adjustment to today's dollars was done with the price deflator for personal consumption expenditures.

[6] For a more complete explication of the case for a revival in US productivity, see Branstetter and Sichel (2017).

What’s (not) up with productivity growth? A quick overview [feedly]

I always like Jared Bernstein's accessible summaries of complex but profound topics like innovation and productivity. Both of these have large economic consequences, but also have significant, less-understood non-economic dimensions. Intangibles (e.g. software) and many services have "values" not fully, or perhaps even adequately, expressed in their price. What's the true value of a health worker's time that saves your life -- considered in either economic or subjective terms? What's the value of Marc Andressen's Mosaic (later Netscape/Mozilla) Internet Browser -- in a "market environment" where code could be copied for free?

Interesting to ponder Bernstein's own preference (despite affirming that "no one knows") for a possible market failure in the slowness of old industries to fully integrate new technologies. He also tends to give a push to demand-side explanations: e.g. there's less innovation and productivity enhancing products and services because people can't afford to increase their consumption at old rates.




Jared Bernstein


For a long while now, I've been thinking and reading about the great productivity growth slowdown, so it seemed like a good time to give the lay of the land as I see it:

–Facts of the case, 1: As measured (as you'll see, this caveat is important), since 2010, output per hour has been growing about 1% per year, half the growth rate of the long-term average. Slowdowns of similar magnitudes have occurred across most advanced economies.

–Facts of the case, 2: The bulk of the slowdown is attributable to a decline in total factor productivity (TFP), or the growth in output when you take out all the measurable inputs. TFP is reasonably considered a proxy for innovation.

–The dreaded "empty hole problem:" Outside of accounting exercises that raise as many questions as they answer, economists do not understand the underlying forces that make productivity speed up and slow down. This creates the "empty hole problem:" since no one knows the answer, partisans fill the hole with their favorite candidate. E.G., here in DC "tax cuts and deregulation!" become the solution du jour.

–Optimists and (sort of) pessimists: When it comes to how lasting our plodding productivity growth rates will be, commentators fit roughly into pessimistic and optimistic camps. The pessimists are the larger group and, at least in my judgement, have better evidence. Their focus is on the slowdown in TFP, and for all the talk about it, no one really knows what drives innovation cycles. In that sense, "who knows?" is a subgroup among the pessimists wherein I place myself. The real pessimist caucus is chaired by the productivity expert Robert Gordon, who argues that the big-ticket productivity movers—e.g., electricity diffusion, air conditioning, indoor plumbing, air travel—are long behind us. Candy Crush is a fun, free diversion, but it ain't a big efficiency play.

–What about mismeasurement? The optimists largely depend on mismeasurement and they bring some evidence to the table. Since we're talking about growth rates, showing evidence of mismeasurement alone is not proof of anything. It must be shown that mismeasurement is getting worse, i.e., that we're increasingly leaving out value added in our measures of real output. Some mismeasurement claims stem from the observation that sectors wherein it is harder for national accountants to pick up true declines in quality-adjusted prices—health care, software, the "app" economy—are the very sectors that are growing as a share of value added, meaning even constant mismeasurement in those sectors could lead to downward bias in measured output and thus productivity.

The biggest mismeasurement advocates are the typically hard-nosed economics team at Goldman Sachs. The figure below shows their portentous adjustments to output from significantly goosing the quality adjustments to IT hardware, software, and "free digital content." Based on this work, they conclude that both GDP and productivity growth are understated by 1/4-1/2 percentage points, which is big in this biz.

Source: GS Research

However, I don't find all their adjustments fully convincing. Careful research points out that we're doing a better job than we used to measuring hardware and software, thus the productivity slowdown may be understated (in the US, we're also producing less IT hardware). Other work finds that, yes, our price indices are missing tech improvements, such that TFP in that sector has hardly slowed at all. But this just implies that TFP outside of tech has decelerated even faster than we thought. Then there's research showing that productivity is falling across many countries, and its decline is uncorrelated with their production of IT.

Also, a bunch of what's allegedly being increasingly mismeasured – e.g., the value of software – are intermediate goods, meaning you've got to show the links in the chain such that final demand is increasingly biased down.

Wherein I fill the empty hole: Here are three explanations that make sense to me. First, some of the most interesting research in this space shows an historically unique divergence between the productivity growth of so-called "frontier" and "laggard" firms. Why has the latter failed to adopt the technologies of the former, and why hasn't that failure led to their demise? This may be an important market failure.

Second, though the productivity slowdown predates the Great Recession, "secular stagnation" has been upon the land for quite a while now, and thus it might be a mistake to reject the hypothesis that weak demand is a factor. I can think of a simple, intuitive model wherein strong demand boosts unit labor costs, squeezing unit profits, such that maintaining profit margins means finding ways to produce more efficiently (this is the "full employment productivity multiplier" about which I've theorized). Third, the most accurate forecasts of productivity growth over the next few years require the use of very long—as in 40 years—autoregressive lags, so perhaps we will eventually mean-revert back to healthier productivity growth rates.

That last point is in the spirit of the most honest answer: who knows?


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