Category: Economics

Some Trouble With the New Economy

There was an article in Time Magazine this week, called The Robot Economy, [behind pay-wall] that described the growing use of high tech robots. There are numerous examples, and one described in the article involved self driving vehicles. Apparently researchers in Japan drove a convoy of automated trucks behind one truck driven by a human driver.

The article notes that some jobs, like most driving, requires human input, but many other jobs don’t. And as computers and robots get more complex they will begin to take more and more jobs. For example the number of longshoremen, who unload ships, is down by 90%, as automated cranes are used to unload containers, rather than humans unloading crates. An example that I am familiar with involved legal secretaries. When I began practicing law in the mid 1990’s, most law firms had many more secretaries than lawyers. But as word processing got easier, and as young lawyers who were comfortable with computers and had long practice doing their own typing replaced old lawyers who needed a secretary, law firms have laid off most secretaries. Today most firms have one secretary/assistant for every three lawyers. Longshoremen and legal secretaries were both fairly well paid jobs. And they are gone.

The fear, as noted in the article, is that at some point machines will be able to do almost everything that people once did. At that point, what will we do for work?

No Solyndra, No Sam Colt

Republicans in Congress were outraged when one of the companies that received a government guaranteed loan under Obama’s stimulus failed. The company in question was called Solyndra, and it made a special tubular solar “panel” that was designed to work in conjunction with white roofs, which are replacing dark roofs on commercial buildings across the nation. White roofs are highly reflective, and the Solyndra “panel” was supposed to be able to absorb both direct and reflected light. Solyndra received a $535 million loan guarantee from the Department of Energy, as part of a program under the Obama stimulus (called the American Recovery and Reinvestment Act) designed to promote “green technology.”

The failure of Solyndra outraged Conservatives on two levels: first because government money was used to support “green” technology, and second because it was part of the hated Obama stimulus. Republicans tried to use it as an example of the failure of both of these programs. In response they proposed a bill to prevent government funding of similar programs, which they called the “No More Solyndras Act.”

Conservatives act as if government funding of new technology is some liberal scheme, that Obama is somehow an outlier, and that these are somehow new programs. But the reality is that the government has long funded business, particularly in cutting edge technology that could not get financing elsewhere. Thomas Jefferson, for example, was fascinated by the idea of interchangeable parts, particularly for weapons. He was certainly not alone. Interchangeable parts for a musket or cannon would mean that the weapon could be quickly and easily repaired on the battlefield. At the time all weapons were hand made, and if a part broke a replacement part needed to be hand made by a gun smith. It was an expensive and time consuming process, and militaries around the world were trying to develop weapons with interchangeable parts. If the triggers and firing mechanisms were interchangeable the weapon could be quickly, and cheaply, repaired.

In 1799 the inventor Eli Whitney gave a presentation of his precisely crafted gun components to Vice President Thomas Jefferson. Jefferson was impressed. He believed that Whitney had perfected the interchangeable part and pushed a bill through Congress to purchase guns from Whitney. But Whitney never succeeded in producing a large quantity of guns with truly interchangeable parts. Despite this failure, the government continued to fund weapons manufacturers who were trying to produce weapons with interchangeable parts. By the 1820’s a gun maker named John H. Hall was producing weapons at the government owned Harpers Ferry Armory that were passably interchangeable. But the real success came with Sam Colt, who mass produced a repeating revolver with precise and fully interchangeable parts. Colt struggled for years to sell his weapon. He sold a few to the Texas Rangers in the 1840’s but was unable to convince the U.S. Army to buy his weapons. In a fortuitous stroke of luck, as tensions with Mexico increased, a Texas Ranger was in Washington talking about problems with Mexico, when he happened to mention that the best weapon the Rangers had when fighting Indians was a Colt Revolver. Based on this praise the army placed an order for one thousand Colt pistols. The era of machine made weapons with fully interchangeable parts began.

I suspect that if the current crop of conservative Republicans had been in Congress in the early 1800’s they would have cut off government funding after the Whitney’s failure, and would have attempted to prevent such funding in the future. Would they have proposed a bill titled “No More Eli Whitneys?” I suspect so. But without Whitney there may have been no Hall, and no Sam Colt.

The Barr Report August 29

The Belated Barr Report Aug 29

Representative Barr wrote a lengthy Op/Ed that was published in the Herald Leader this past Monday. It is available here.

Barr was responding to news reports from the New York Times that noted that he was one of the most prolific fundraisers on the House Financial Services Committee. The report was rebroadcast by the Herald Leader, and is available here.

I was surprised by the length of the response, and my initial impression was to paraphrase Hamlet: “Me thinks the Representative doth protest too much.” He was clearly stung by the criticism, and his need for a lengthy response seemed to indicate that the criticism hit close to the mark.

His response was voluminous, but I want to address two specific things that he discussed.

The first was that additional financial reforms were needed because Dodd-Frank failed “to fix Fannie May and Freddie Mac, the giant government-sponsored enterprises whose reckless policies were at the epicenter of the 2008 subprime mortgage crisis.” This is a common conservative trop, repeated often by Republican politicians, but not supported by any reputable economists. There is no doubt that government support of mortgages helped some people qualify for mortgages that were not qualified, but the main culprit in the collapse was the esoteric financial instruments known as derivatives, which allowed banks to move mortgages off their balance sheet and magically transform them from a debt to an asset.

The New York Review of Books has a lengthy analysis of Fannie and the Crisis. Did Fannie Cause the Disaster?

The Atlantic Magazine notes that the housing crisis occurred at the time that Fannie and Freddie’s market share of high risk mortgages dropped. For the Last Time, Fannie and Freddie Didn’t Cause the Housing Crisis

The best and most data filled (through links) analysis is from the Rortybomb blog: What Can We Say For Certain Regarding the GSEs?

Fannie and Freddie accounted for less than 5% of the subprime losses, and 84% of subprime loans were issued by private lending institutions. Certainly federal support for mortgages had a minor contributing role, but to say it was the main cause is to ignore the effects of the free market and to clearly expose your anti-government bias.

The second issue regards the Dodd-Frank bill which was supposed to reform the financial services industry in the aftermath of the crash. There are numerous criticisms of Dodd-Frank, most involving the way it has restricted commercial lending on the local level. This is a serious concern and needs to be addressed. But Barr’s proposed bill (which he mentions in his article) addresses consumer lending practices, which were (1) at the heart of the collapse, and (2) not the main complaint by banks and the financial industry about Dodd-Frank.

The conservative commentator Michael Barone had an interesting analysis based on a book review at the National Review Online [http://www.nationalreview.com/articles/336977/dodd-frank-s-problems-and-potential-solutions-michael-barone] The problem with Dodd – Frank is that is creates a separate set of rules for big banks and smaller banks. It allows larger banks to borrow at a lower rate than smaller banks, and creates a system to bailout larger banks that is not available for smaller banks. The idea is that large banks have such a major impact on the economy that their failure would harm the overall economy; i.e. they are too big to allow to fail.

Other criticism of Dodd-Frank is that it is a massive warren of regulation that make it hard for financial institutions to know what is allowed and what is not. See http://www.economist.com/node/21547784

These regulations create a far bigger burden on small banks than on large financial institutions that have massive legal teams to interpret the rules, and highly paid lobbyists to modify them in their favor. It is fairly well documented that these regulatory burdens put more directly harm the lending practices of small and regional banks that large banks, and that this mostly impacts commercial lending than consumer lending.

Finally, here’s a good Forbes Article with an overview of the problems and possible solutions to Dodd-Frank, and there is nary a mention of problems in consumer lending.
http://www.forbes.com/sites/tedkaufman/2013/07/17/an-unhappy-birthday-for-dodd-frank-as-momentum-builds-for-the-next-meltdown/

Tolerance is Good for the Economy

Tolerance is not only good for the soul, but its good for business and good for the economy.

There was a brief news story in the business section of the Herald-Leader this morning that said that a majority of businesses now provide domestic partner benefits. (It was in the print edition, but apparently not available on-line.)

This statistic appears to include all businesses, but it mirrors the numbers for Fortune 500 Companies. According to the Human Rights Campaign, 62% Fortune 500 companies offer domestic partner health benefits, 57% prohibit discrimination based on gender identity, and 88% prohibit discrimination based on sexual orientation. LGBT Equality at the Fortune 500

The HRC notes that the higher up on the Fortune 500 rankings, the more likely the company is to provide comprehensive benefits for LGBT employees.

And in related news, on Monday, Walmart announced that it would begin providing all health and other benefits to domestic partners of employees, including same sex partners. Walmart to offer same-sex domestic benefits

These companies do this because its good for business. It allows them to attract and retain the best employees, and allows them to market their products and services to the widest possible range of consumers. They do it because tolerance is good for business.

Science and the Economy

Science is the foundation of the modern economy. Scientific advances fuel economic growth, and have since James Watt applied Boyle’s law to create a working steam pump. But today  conservatives are so opposed to any government spending that they will deprive the American economy of fuel.

Here’s a truly distressing news story that proves this point. Conservatives are leading the charge to cut federal support for scientific research for two reasons: first, they don’t like science, and second, they have no clue about the importance of government support of science.

Read it and weep:  Sequestration Ushers in Dark Ages For Science.

Economic Growth in the Developed World

Recently an economics professor from Northwestern named Robert Gordon published a working paper on line called “Is U.S. Economic Growth Over?” His central thesis is that the effects of the Industrial Revolution have played out across most of the world’s economies, and the high growth rates present during various periods of the industrial revolution will largely be a thing of the past.

Part of the reason is that modern countries are about as modern as they will get. We might get new gadgets, but there aren’t any truly transformative technologies on the horizon. Phones might get fancier with more functions, but we are at a point where most people in the developed world, and certainly in the US, have the ability to quickly and easily communicate with other people. One example cited in the article is that a contemporary kitchen has most of the same appliances as a kitchen of 50 years ago – modern stove and oven, refrigerator, dishwasher – but the kitchen of 1960 was dramatically different from the kitchen of 1910, where food was cooked over a real fire and where ice boxes held real ice. Modern kitchens might have new gadgets, cool wine decanters, food processors, etc., but these have only a minor impact on making cooking easier and more efficient.

The countries with higher rates of economic growth are those countries where people are moving from a pre-industrial existence to a modern existence. Think China, where peasants are moving from the country-side, where they lived in huts and cooked over fires, to the city where they live in apartments with modern appliances.

A New York Magazine article analyzing the article can be found here: The Blip.

The Full article can be found here: Is U.S. Economic Growth Over.

I should note that I have not read the full article, but have read the New York Magazine piece.

The article notes that many other economists view Gordon as unduly pessimistic. They note that new technologies still have the power to transform economies. The bad news is that there is probably some truth to Gordon’s theory. It does explain why economic growth has slowed in modern economies.

A Tale of Two Programs

I was recently reading a blog post by a conservative commentator talking about using on line resources and on-line course to “fix” the “problems” with American higher education. Something struck me about this. There is no doubt that there are some problems facing the American higher education system, the main one being price, and certainly the availability of on line courses could provide greater access at lower cost. But the American higher education system is the best in the world. In fact it is the envy of the world. China and Saudi Arabia are trying to build new universities from scratch to mimic American universities. Students from around the world flock to the United States to attend our colleges and universities. And according to the Shanghai “Academic Ranking of World Universities” the vast majority of the top universities in the world are in the United States.

One could look at this and say that the market has spoken. The worldwide market for education has said that the higher education system in the United States is the best in the world. Despite this many conservatives hate it, and want to change it. On the state level many conservative state legislators are trying to strip funding from public colleges and universities. And at least two conservative governors, Rick Perry of Texas and Bob McDonnell have proposed plans to restructure state schools that most academics say will erode the quality of state universities.

So the United States has the best higher education system in the world, and conservatives want to change it.

Compare that with the American health care system. It is a system fraught with problems. Millions are uninsured and lack access to adequate health care services. They do have access to emergency health care services, but this drives up the cost of health care for everyone else. The cost of health care is rising far faster than the rate of inflation. The United States spends more per capita on health care than any other nation, yet we have a poor infant mortality rate and a relatively low life expectancy, particularly for a developed country. The cost of health care is a drain on the economy, and a competitive disadvantage for American businesses.

Despite these problems, conservatives oppose changing the system.

I’m baffled. Conservatives want to change the best system in the world, but don’t want to change a deeply flawed system. Weird.

Economists Agree: Immigration is Good for the Economy

Economists Agree: Immigration is Good for the Economy

Now we just need to get politicians on board.

A recent study indicates that most of the growth in the U.S. labor force over the next twenty years or so will be from immigration. The study also shows that immigration is good for the economy. This should not be a surprise since most economic studies show the positive effects of immigration. In fact the only people who disagree are conservative politicians.

This study also shows that most immigrants live in metropolitan areas. And for metropolitan areas to thrive they need to continue to be a magnet for immigration.

An article describing the study, with a link to the study itself, can be found on Quartz at Almost all Growth.

Woman’s Work

I recently came across an interesting study from the Organization for Economic Cooperation and Development that said that countries where women have more economic and political power are richer than countries where women have less power. In other words, the more that women participate in the economy, and in the workforce, the better off the economy of the country.

The study can be found here: Gender Equality in Education, Employment and Entrepreneurship.

The United States ranks pretty high on the list. But it is interesting that some politicians want to limit the ability of women to participate in the economy. There are even some social conservatives, who are generally aligned with the business wing of the Republican Party, who openly call for a return to a world where women stay home.

If the economy improves when more women participate, then we should support policies that help women fully participate in the economy. What kinds of programs? How about programs that support better and cheaper day care? Or programs that ensure adequate maternity leave so that qualified women can easily re-enter the workforce after having a baby. Or laws that ensure equal pay for equal work, so that women are fully compensated when they fully participate. Or laws that ensure adequate access to contraception and reproductive health care services so that women can control their bodies.