Tuesday, August 09, 2016

Questions for Professor Robert J. Gordon from a former student

Recently, I've been seeing a lot about my former professor.  He had an Op-Ed piece in the NY Times yesterday, which is what motivated this blog post.  Before that I read this book review by William Nordhaus, Why Growth Will Fall, which takes up the findings of Gordon's book, The Rise and Fall of American Growth.  A week or two earlier I listened to this podcast where Gordon discusses his book with Jeffrey Sachs.  Several months ago some of my classmates from graduate school had a little thread about Gordon's book in Facebook.  And there was also Paul Krugman's review of Gordon's book earlier in the year.

I confess that I haven't yet read Gordon's book nor have I read Piketty's book, Capital in the Twenty-First Century, which was the rage a year or two ago.  Perhaps that lack of background disqualifies the questions posed below.  I am making this admission, in fact, to generate some guilt feelings as motivation to get me to read these works, even if it is a little late in the game to do so.  My recent book reading has been pure escapism fiction and in one instance some background reading on volunteer work I'm doing.  I do more non-fiction reading in magazines.  That has become my pattern the last year or two, but maybe the pattern needs to be shaken up a little.

I do think I have the gist of Gordon's argument already and indeed what is kind of funny is that he was singing something of the same tune back when I took that class from him.  This coming January will be the 40th anniversary of that course, the second quarter in a three-quarter macroeconomics sequence at Northwestern for first year graduate students in Economics.  Back then the economy was experiencing "stagflation" and it offered up puzzles, both as to the cause and regarding the appropriate policy response.  The inflation part did seem easier to understand - OPEC price shocks, wage and price controls under Nixon creating a persistent disequilibrium thereafter, deficit spending to finance the Vietnam War, and then something called cost-push inflation.

The stagnation part was more of a puzzle and Gordon mentioned lack of productivity growth in class, many times.  I don't recall any good explanation being offered up for that, which very well could be my poor memory or it could be that such an explanation was lacking.  A few years later, after Reagan became President and I had taken a job at Illinois, it became clear that the Japanese automobile companies were cleaning the clock of the big American car companies.  A few years after that I read David Halberstam's The Reckoning, which hammered on the point that the Japanese companies were run by engineers while the American companies were run by MBAs.  This difference in leadership got reflected in difference in mission.  The Japanese were focused entirely on making a better product.  The Americans were focused on (economic) rent generation and rent protection.   I believe this issue is still with us now, for example with how private equity firms run businesses, and is actually far more widespread than it was in the 1980s. 

As to policy response, the "rational expectations revolution" was just underway, and I believe we read a paper by Sargent and Wallace on the impotence of monetary policy that was in this mold.  We may have also read something by Milton Friedman on rules versus discretion and that the problem with discretion is both timing, which usually isn't very good, and intensity, which might not match what the situation calls for.  Considering those readings now, it is unclear to me whether a prior disposition in favor of laissez-faire and against government activism motivated the development of models which would support those conclusions.  All that seems obvious to me now on this score is that our national politics was much milder then.  There were two schools of thought within macroeconomics, the Cambridge school and the Chicago school, but there was not the intense alignment between the two schools and the political parties that there seems to be now. 

Here is another confession before I get to my questions.  I never "got" macro, much in the same way that I never got poetry in high school.  I worked through the models and I could do the manipulations that were required, more or less, but the underlying modeling assumptions and why those were appealing remained a complete mystery to me.  Empirical regularities, notably the seeming tradeoff between inflation and unemployment that explains the Phillips Curve, which stagflation seemed to be showing was not so regular, provided the basis for the various scissor models we considered (such as the static IS-LM model and the dynamic Phillips Curve - EE curve model).  After graduate school I became a reasonably competent theoretical microeconomics guy and am comfortable with stories that have a microeconomics basis.  I never could tell a convincing story that came out of these macroeconomics models and have been fortunate that I never had to teach macro to undergrads, as I'd have flubbed that quite badly.

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What follows are a few question about fundamentals and modeling approach.

1.  I was surprised in the NY Times piece from yesterday that Gordon talked about scarcity of skilled labor as a threat to sustained economic growth.  Are things different now in this regard than they have been historically?   Since the skills we're talking about are acquired, not innate, doesn't the economy have auto-corrective mechanisms within it to encourage further skill production when that is needed?  What I have in mind is that the wages of the people with the scarce skills begin to rise.  That wage increase becomes known to others and that encourages some of these others who want higher incomes for themselves to acquire those skills.  Then supply of that particular type of human capital increases, which addresses the potential bottleneck for the economy.  Is that mechanism broken now and, if so, how?

2.  I also wondered whether Professor Gordon has ever considered his own productivity and, if so, has it been flat over time or has it been rising?  And on this does the answer depend on how you look at things.  One possible look is at the rate of scholarly output that Professor Gordon has engaged in.  I did a quick search at Google Scholar to verify that he's been a prolific producer of scholarship over the years and productivity growth (or lack thereof) has been a theme for him all this time.  This measure (just eyeballing, no serious counting) suggests flat productivity in Gordon's research, albeit at a high level.  A different way to look at Gordon's productivity, however, is to consider the impact of his research.  On this one, perhaps he has made a bigger splash as of late, his recent book seems to fit this story.  If the big splash story makes sense, then knowledge work may simply be different from widget production, in that with knowledge work one can't separate the output measure from the audience measure.   Sometimes in academia we do measure scholarly output like widgets, by counting lines on a CV.  Yet we also care about placement of the work.  Further we used to talk about the seminal paper in an area and prized that even more for establishing a new line of research.  Maybe we need a different category to describe knowledge work that moves the conversation broadly, whether it is seminal or not, especially if the audience is the general public.

3.  Then I wonder how much of productivity slowdown can be explained by composition effects, the obverse of Baumol's Cost Disease, if you will.  The particular example I have in minded is extended care for the elderly, something my parents had in their condo before they passed away.  A lot of the care is just sitting around, being available for when the need arises.  Then it is pushing the wheel chair, putting a new dressing on a wound that is slow to heal, making a meal and perhaps even spoon feeding the patient.  The work is very labor intensive and it has little to no productivity increase associated with it over time.  As more and more of the economy is devoted to such activities (child care is another one of these) that leaves a smaller part of the economy that can actually experience productivity growth.  The growth of the economy overall is an average of the growth rates in the various sectors.  Does this sort of composition effect do anything at all to explain the recent puzzle in productivity slowdown?  If so, is it a big part of the story or not?

4.  I also wonder whether we are mismeasuring economic output in the knowledge economy in ways that are far worse than the historical mismeasurement problems associated with GDP.  In the macroeconomics class we took in the first quarter, with Professor Eisner, we learned about the issue of non-market work (e.g., housework done by the homeowner and child care in the home done by the parent), which is not counted in GDP but should be, and for which there were some efforts at correction by imputing the value of the non-market activity.  We read a few papers on this.  The system I remember was called TISA (Total Income System of Accounts).  Now we have a different issue, the importance of the Internet in our lives and that everything out on the Web should be considered public good, but GDP values this as private good only, say via the ad revenue generated by a particular Web page.  By that measure my blog has zero value.  (And maybe after reading this post you'll concur with that assessment.)  The point is that the private good measure doesn't capture the reader benefit well.

Further, we can probably agree that such audience benefit with online content can be roughly measured by whether a video has gone viral or if a book makes a big splash, so that volume of access gives some measure of audience value.  But how do we value the system that enables these diffusion activities?  Professor Gordon is known for saying that we've already captured most of the productivity gains from introducing the Internet into our lives.  But is too much of that a focus on ordinary work and not enough on the frequency that audiences get exposed to superstar content?

It seems to me that commercial book and video production has gone down the route of focusing too much on blockbusters (how many movies based on comic books do we really need?) and the fledgling creators of content are under served this way.  But self-publishing is much easier now.  Counting the diamonds in the rough may be difficult and GDP not all that useful for measuring this.  That, however, doesn't mean those diamonds are there, or does it?

The last point about non-market activity I'd make here is for something we are not yet doing very much of but I hope we will be doing a great deal of in the future.  That is generating electricity in our own homes and places of work via installed solar panels and thus not buying electricity from the public utility, thereby lessening the need to use fossil fuel to generate that electricity.  Under current measures of income, this switch to self-generation of electricity is measured only by the cost of installing and maintaining the solar panels and batteries, but not at all by the foregone burning of fossil fuels.  The benefit, however, is captured better in the second measure and what is clear is that the two measures need not align, even approximately so.    What can be done regarding measurement to get better dollar figure for the second measure?

5.  My last question is about why there is so much concern about income growth and not nearly the concern about wealth level?  Does this reflect a distaste for activist wealth redistribution policies, a belief that such policies are not feasible, or is it simply an artifact of an earlier time when incomes were more equal and wealth more evenly distributed so that income growth was the correct measure of progress then and we're locked into that measure now?  Put a different way, if you are already rich, should you care about income growth or not?

Earlier this year I did some rudimentary calculations about household wealth in the U.S.  My arithmetic and scanning online for information of this sort produced that median household wealth is around $81K, while mean household wealth is around $650K, and the mean household has 2.6 people.  (These calculations and related analysis are given in a post called The Euphemism We Call Globalization and the Real though Non-Proximate Causes of Weak Wages.)  Those numbers are not meant to be precise, just in the right ballpark.  If the median were raised substantially to get it closer to the mean, say the median tripled or quadrupled, would we still care a lot about income growth?  Conversely, if the median could be raised substantially through activist government policy, shouldn't we want such policy even if it retarded income growth somewhat, because the many would benefit at the expense of the few?

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Let me come to a close.   In the mid to late 1990s, when I made a career switch and turned to learning technology, I operated under the belief that online would totally revolutionize learning.  It took me a few years to change my mind on that and indeed while I still believe online is useful now I believe we should be focusing on high touch ways to teach and learn and that the technology card has been vastly oversold.  So I am sympathetic to the message that Gordon has been delivering, as he has been saying much the same thing for the economy as a whole.  But he seems to relish delivering a pessimistic message and I wonder if that is necessary.

Perhaps it is.  The political rhetoric now still seems to be about jump starting the economy.  There are clear short term gains to be had (infrastructure is the one most people seem to agree with now).  But what of the long term?  If the recognition is that long term growth will be tepid, might we make some progress then on question #5?   If it is impossible for us to make progress on question #5 till we come to that realization, then Gordon is doing a public service for us all, even if most of us would prefer a more optimistic message. 

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